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Gratuity Act Explained: Eligibility, Formula and the ₹20 Lakh Cap

Published July 23, 2026 · Updated October 3, 2026 · 5 min read · By Ramanathan · Paired with the Gratuity Calculator

Gratuity is a lump sum your employer pays you as a thank-you for long service — a statutory benefit that was originally set out in the Payment of Gratuity Act, 1972. That Act was repealed and folded into the Code on Social Security, 2020 when India's labour codes took effect on 21 November 2025. The eligibility rule, the formula, and the ₹20 lakh cap described below are unchanged by that move — but the Act name you'll still see quoted everywhere, including in this guide's title, is now technically historical. It sounds simple either way, but the eligibility rule, the formula, and the tax treatment all have wrinkles that surprise people at exit time. This guide walks through each, and you can plug your own figures into the gratuity calculator as you read.

Who is eligible for gratuity under the 5-year rule?

The Act covers establishments with ten or more employees. Gratuity becomes payable when you leave after at least five years of continuous service with the same employer — on resignation, retirement, or superannuation. The five-year condition is waived if service ends due to death or disablement, in which case gratuity is paid regardless of tenure (to the nominee, in the case of death). One nuance is often argued: some courts have held that 4 years and 240 days in the fifth year counts as five years, because "continuous service" is defined partly in worked days. This is not universally applied, though, so treat a clean five years as the safe threshold. If retirement is your exit point, an India retirement date calculator can show which date that lands on.

What is the gratuity calculation formula?

For employees covered by the Act, gratuity is:

Gratuity = (15 × last drawn monthly salary × years of service) / 26

"Last drawn salary" here means Basic + Dearness Allowance, not your full CTC. The 15 represents 15 days' wages for each completed year, and the 26 is the number of working days in a month the Act uses (a month minus its four Sundays). For employees not covered by the Act, a similar formula applies but divides by 30 instead of 26, because it counts all calendar days. That actually produces a slightly smaller figure for the same inputs.

The rounding rule for part-years

Years of service are not always whole, and the Act rounds them a specific way for covered employees: a period beyond six months in the final year counts as a full year, while six months or less is dropped. So 7 years and 7 months is treated as 8 years, but 7 years and 5 months stays 7 years. This single rule can swing your payout by a full year's worth of gratuity, so it is worth timing an exit with in mind. The calculator applies this rounding automatically.

The ₹20 lakh ceiling

However the formula works out, statutory gratuity is capped at a ceiling of ₹20 lakh. If your calculated figure exceeds it, the mandatory amount is limited to ₹20 lakh — though an employer may choose to pay more voluntarily, and that excess is treated differently for tax. The ceiling has been revised upward over the years, which is why it is worth confirming the current figure. Our calculator holds it as a dated value that is reviewed against the Budget cycle, so it does not silently go stale.

A note on timing: the core mechanics on this page — the five-year rule, the 15/26 formula, and the ₹20 lakh ceiling — are settled and unchanged under the Code on Social Security, 2020. What is still being finalised, through central rules the government has not yet notified in full, is a separate and narrower question: how gratuity is calculated for employees whose Basic pay is a small share of a high total salary. If a large payout is riding on the exact figure, confirm the current rule with your employer's HR or payroll team before relying on it.

Is gratuity taxable?

Tax treatment depends on your category:

This is why the ₹20 lakh cap matters not just for what you receive, but for how much of it you keep.

A worked example

Suppose your last drawn Basic + DA is ₹50,000 and you served 7 years and 8 months. Here is the same service under both versions of the formula:

Covered status is worth ₹55,769 more here: ₹26,923 from the smaller divisor and ₹28,846 from the part-year rounding. Neither figure is near the ₹20 lakh cap, so the full amount is payable and, being within the formula limit, exempt from tax.

When the ₹20 lakh cap actually starts to bite

At a ₹50,000 salary the cap is a non-issue — the formula would not reach it within any real career. It becomes real at higher salaries. Take a covered employee on a ₹2,00,000 last-drawn Basic + DA:

The formula and the payable amount track each other exactly until year 18, where the uncapped result first crosses ₹20 lakh — after that, every additional year of service adds nothing to the payout. A senior employee with a high Basic and a long tenure is precisely the profile for whom the cap matters most, and it's worth knowing in advance rather than discovering it at exit: years 18 through 30 of service in this example are, from a gratuity standpoint, unpaid.

Points people miss

A few things trip employees up. Gratuity is on Basic + DA, not CTC, so a salary structure with a low Basic quietly shrinks your eventual gratuity. The five-year clock is per employer — changing jobs resets it, which is one hidden cost of frequent switching. Gratuity is separate from your provident fund and is paid on top of it. And your nominee matters: keep the nomination updated, because in the event of death the gratuity goes to whoever is on record. Run your own numbers on the gratuity calculator and check the Basic + DA figure on your pay slip, since that is the number that drives everything.

Estimate your gratuity:
Gratuity Calculator Salary / CTC Calculator

Related guide: PPF rules — lock-in, partial withdrawal, and loans

This guide uses Indian figures and rules. See the India home loan & EMI hub for more India-specific calculators and guides.