Gratuity is a lump-sum payment made by an employer to an employee as a recognition of long service. For many Indian salaried employees in the private sector, it is the first substantial sum they receive at the end of employment — but it is also among the most misunderstood: when you qualify, how the amount is calculated, what is taxable, and how to verify whether your employer's calculation is correct. This guide covers the practical mechanics.

Disclaimer: Gratuity law in India (the Payment of Gratuity Act, 1972) has specific eligibility conditions, employer coverage criteria, and tax treatment that depend on your employment type and company status. This guide provides general educational context — it is not legal advice. Verify your specific entitlement with your HR team and, for complex situations, a labour law qualified.

What gratuity is designed to do

The Payment of Gratuity Act was enacted to provide a defined benefit to employees who have spent meaningful time at an establishment. The intent is similar to a long-service bonus:



employees who commit to an employer for multiple years receive a proportional benefit upon leaving (whether through resignation, retirement, or other separation). It is distinct from EPF — gratuity is paid by the employer as an obligation, while EPF is a shared contribution that accumulates in your individual account.

The 15/26 formula: how the common estimate works

The most referenced formula for covered establishments under the Payment of Gratuity Act is:

Gratuity = (Last drawn monthly salary × 15 × Years of service) / 26

Where "last drawn monthly salary" is typically Basic + DA (Dearness Allowance) for covered employers under the Act. The "26" represents a notional 26 working days per month. The "15" represents 15 days of salary per year of service.

Example: Basic + DA = ₹40,000/month, 6 years of service. Gratuity = (₹40,000 × 15 × 6) / 26 = ₹36,00,000 / 26 = ₹1,38,461.

For partial years: under the Act, a service period of

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