Gratuity Calculation Rules in India: Formula, 5-Year Eligibility & ₹20 Lakh Tax Exemption Limit under Payment of Gratuity Act 1972

What is Gratuity in Indian Employment?

Gratuity is a statutory monetary benefit paid by an employer to an employee in recognition of long and dedicated service. Governed by the Payment of Gratuity Act, 1972, it is payable upon retirement, resignation, superannuation, or death/disability.

The 5-Year Continuous Service Rule

An employee is eligible for gratuity only upon completing at least 5 continuous years of service with the same organization. The 5-year rule is waived only in the unfortunate event of an employee’s death or permanent disablement due to accident or disease.

The Statutory Formula: Why 26 Working Days?

For establishments covered under the Gratuity Act (10+ employees):

The divisor is 26 because Sundays are excluded, treating a month as having 26 working days. If an employee completes more than 6 months in their final year of tenure (e.g. 7 years and 7 months), it is rounded up to 8 years.

Step-by-Step Worked Gratuity Example

Section 10(10) ₹20 Lakh Tax Exemption Ceiling

Under Section 10(10) of the Income Tax Act, gratuity received by private sector employees is exempt from tax up to a lifetime ceiling of ₹20,00,000 (raised from ₹10 Lakhs). Any gratuity amount exceeding ₹20 Lakhs is taxable as salary income. For central and state government employees, gratuity is 100% tax-free without any upper limit.

Compute your exact entitlement using the SolveKits Gratuity Calculator.