How gratuity is calculated
Gratuity is a lump sum your employer pays you for long service. For employees covered by the Payment of Gratuity Act, 1972, the formula is:
Gratuity = (Last drawn salary × 15 × years of service) ÷ 26
Here "last drawn salary" means your basic pay plus dearness allowance (DA) in your final month, "15" represents fifteen days' wages for each completed year, and "26" is the assumed number of working days in a month. A part-year of six months or more is rounded up to a full year — so 7 years and 8 months counts as 8 years.
Who is eligible
You qualify for gratuity after completing at least 5 years of continuous service with the same employer. This minimum is waived if employment ends because of death or disablement. If you are not covered by the Act, gratuity is calculated as (last drawn salary × 15 × completed years) ÷ 30, counting only whole years.
Tax on gratuity
Gratuity received by central and state government employees is fully tax-free. For everyone else, gratuity is exempt up to a lifetime ceiling of ₹20 lakh; anything above that is added to your income and taxed at your slab rate. The exemption is the least of the actual gratuity, the formula amount, and ₹20 lakh.