Complete Guide to Gratuity Formulas in India – 2025

Introduction to Gratuity

Gratuity is a statutory financial benefit paid by employers to employees as appreciation for their long-term service. In India, gratuity is governed by the Payment of Gratuity Act, 1972, which mandates gratuity payments for employees who have completed a minimum of 5 years of continuous service (except in cases of death or disability).

1. Basic Gratuity Calculation Formulas

Formula for Employers Covered Under Payment of Gratuity Act, 1972

Component	Details
Formula	Gratuity = (n × b × 15) ÷ 26
Where:
• n	Number of completed years of service
• b	Last drawn salary (Basic Pay + Dearness Allowance)
• 15	Represents 15 days of wages
• 26	Working days in a month (excluding Sundays)
Eligibility	Minimum 5 years continuous service
Maximum Limit	₹20 lakh (excess treated as ex-gratia)

Example Calculation:

• Last drawn salary: ₹50,000 (Basic + DA)
• Service tenure: 10 years
• Gratuity = (10 × 50,000 × 15) ÷ 26 = ₹2,88,461

Formula for Employers NOT Covered Under Gratuity Act

Component	Details
Formula	Gratuity = (n × b × 15) ÷ 30
Where:
• n	Number of completed years of service
• b	Last drawn salary (Basic Pay + Dearness Allowance)
• 15	Represents 15 days of wages
• 30	Total days in a month
Eligibility	Minimum 5 years continuous service
Maximum Limit	As per company policy

Example Calculation:

• Last drawn salary: ₹50,000 (Basic + DA)
• Service tenure: 10 years
• Gratuity = (10 × 50,000 × 15) ÷ 30 = ₹2,50,000

2. Government Employee Gratuity Formulas

7th Pay Commission – Retirement Gratuity Formula

Component	Details
Formula	Gratuity = (Basic Pay + DA) × (1/4) × Years of Service
Alternative Formula	Gratuity = 16 × Last Basic Pay (whichever is less)
Calculation Rate	1/4th of month’s basic pay + DA for each completed 6-monthly period
Maximum Limit	₹25 lakh (for Central Government employees post-2025)
Minimum Service	5 years for pension eligibility

Example Calculation:

• Basic Pay + DA: ₹80,000
• Service tenure: 25 years
• Method 1: (80,000 × 1/4 × 25) = ₹5,00,000
• Method 2: (16 × 80,000) = ₹12,80,000
• Payable Amount: ₹5,00,000 (lower of the two, subject to ceiling)

Service Gratuity Formula (Less than 10 years service)

Component	Details
Formula	Service Gratuity = (Basic Pay + DA) × (1/2) × Completed 6-month periods
Eligibility	For government employees with less than 10 years service
Payment	In addition to retirement gratuity
Maximum Limit	₹25 lakh

3. Death Gratuity Formulas

Death Gratuity for Government Employees

Component	Details
Formula	Death Gratuity = 12 × (Basic Pay + DA) at time of death
Alternative	Death Gratuity = (Basic Pay + DA) × (1/2) × Completed years
Payable Amount	Higher of the two calculations
Maximum Limit	₹25 lakh (Central Govt), ₹20 lakh (Others)
Service Requirement	No minimum service required

Death Gratuity for Private Employees

Component	Details
Formula	Death Gratuity = (n × b × 15) ÷ 26
Eligibility	No minimum service requirement in case of death
Maximum Limit	₹20 lakh
Payment to	Nominee or legal heir

4. Special Calculation Rules

Service Period Rounding Rules

Scenario	Treatment
6 months or more	Rounded up to next full year
Less than 6 months	Ignored in calculation
Example: 10 years 7 months	Counted as 11 years
Example: 10 years 4 months	Counted as 10 years

Components of Last Drawn Salary

Included	Excluded
Basic Salary	House Rent Allowance (HRA)
Dearness Allowance (DA)	Conveyance Allowance
Fixed Allowances (if part of salary in 1972)	Medical Allowance
Overtime Payments
Bonus

5. Tax Implications on Gratuity

Tax Exemption Limits

Employee Type	Tax Exemption
Government Employees	Fully exempt from income tax
Private Employees (Covered under Act)	Least of:
• ₹20 lakh
• Actual gratuity received
• 15 days salary × years of service
Private Employees (Not covered)	Least of:
• ₹10 lakh
• Actual gratuity received
• Half month salary × years of service

6. Updated Limits and Recent Changes (2025)

Current Maximum Limits

Category	Current Limit	Previous Limit
Central Government Employees	₹25 lakh	₹20 lakh
Private Sector Employees	₹20 lakh	₹10 lakh
Tax-Free Limit (Private)	₹20 lakh	₹10 lakh
Fixed-term Employees	Eligible after 1 year	Previously 5 years

Recent Updates

1. 7th Pay Commission Changes: Government gratuity ceiling increased from ₹10 lakh to ₹20 lakh, further enhanced to ₹25 lakh
2. Tax Exemption Enhancement: Private sector tax-free limit increased from ₹10 lakh to ₹20 lakh
3. Fixed-term Contract Workers: Now eligible for gratuity after completing just 1 year of service
4. Proposed Enhancement: Central government considering increase of tax-free limit to ₹25 lakh (implementation pending)

7. Practical Examples with Step-by-Step Calculations

Example 1: Private Sector Employee (Covered under Act)

• Last Drawn Salary: ₹75,000 (Basic: ₹45,000, DA: ₹30,000)
• Service Period: 12 years 8 months
• Calculation Steps:
  1. Adjust tenure: 12 years 8 months = 13 years (rounded up)
  2. Apply formula: (13 × 75,000 × 15) ÷ 26
  3. Gratuity Amount: ₹5,76,923

Example 2: Government Employee (7th Pay Commission)

• Basic Pay + DA: ₹90,000
• Service Period: 30 years
• Calculation Steps:
  1. Method 1: (90,000 × 1/4 × 30) = ₹6,75,000
  2. Method 2: (16 × 90,000) = ₹14,40,000
  3. Payable Amount: ₹6,75,000 (lower amount, subject to ₹25 lakh ceiling)

Example 3: Death Gratuity Calculation

• Employee Status: Government employee
• Basic Pay + DA at death: ₹1,00,000
• Service Period: 18 years
• Calculation Steps:
  1. Method 1: 12 × ₹1,00,000 = ₹12,00,000
  2. Method 2: (₹1,00,000 × 1/2 × 18) = ₹9,00,000
  3. Payable Amount: ₹12,00,000 (higher amount, subject to ceiling)

8. Important Notes for Students

Points to Remember

1. Minimum Service: Generally 5 years, but waived in case of death/disability
2. Payment Timeline: Employer must pay within 30 days of becoming due
3. Nomination: Employees should nominate beneficiaries using Form F
4. Continuous Service: Includes periods of leave, strike, lock-out (if not employee’s fault)
5. Multiple Employers: Gratuity calculated separately for each employer
6. Forfeiture: Can be forfeited in case of misconduct leading to termination

Common Mistakes to Avoid

1. Including non-eligible allowances in salary calculation
2. Not rounding service period correctly
3. Confusing formulas for covered vs. non-covered employers
4. Ignoring maximum ceiling limits
5. Miscalculating tax implications

Conclusion

Understanding gratuity calculations is crucial for both employees and employers. The formulas vary based on employment type, coverage under the Gratuity Act, and recent legislative changes. Always verify with current regulations and consult financial advisors for complex situations.

Frequently Asked Questions (FAQs)

Q. What is the maximum gratuity amount payable in India?

The maximum gratuity amount varies by employee category. For private sector employees covered under the Payment of Gratuity Act, 1972, the ceiling is ₹20 lakh. For Central Government employees, the limit has been increased to ₹25 lakh (effective from January 1, 2024, when Dearness Allowance reached 50% of basic pay). Any amount paid beyond these limits is considered ex-gratia payment.

Points:

• Private Sector: ₹20 lakh maximum
• Central Government: ₹25 lakh maximum
• State Government: Generally ₹20 lakh (varies by state)
• Excess amounts are treated as ex-gratia payments

Q. Can I receive gratuity before completing 5 years of service?

Generally, 5 years of continuous service is mandatory for gratuity eligibility. However, employees are eligible for gratuity benefits in cases of death or disability due to accident or disease, regardless of their length of service. Under certain interpretations, employees with 4 years and 7 months (4 years 240 days) of service may qualify if the employer rounds up the period to 5 years.

Exceptions to 5-year rule:

• Death of employee (no minimum service required)
• Permanent disability due to accident
• Critical illness preventing work
• Company policy allowing early payment (employer discretion)

Q. How is gratuity taxed, and what are the tax exemption limits?

Tax treatment depends on the employee category. The complete gratuity amount received by government employees (Central, State, or Local Authority) is fully exempt from income tax. For private sector employees covered under the Gratuity Act, the least of the following three amounts is tax-exempt: (a) ₹20 lakh, (b) Actual gratuity received, or (c) Eligible gratuity calculated as 15 days’ salary for each year of service.

Tax Exemption Summary:

Example: If you receive ₹15 lakh as gratuity and your eligible amount is ₹8 lakh, only ₹8 lakh is tax-exempt.

Q. Will I still receive gratuity if my employer goes bankrupt or the company shuts down?

Yes, gratuity is legally payable even if the employer goes bankrupt. The Payment of Gratuity Act, 1972 protects employees’ gratuity rights, and no court order can withhold the gratuity amount. However, practical challenges may arise in recovery. To address this concern, states like Karnataka, Telangana, and Andhra Pradesh have implemented Compulsory Gratuity Insurance Rules (2024), mandating employers to obtain insurance from LIC or approved insurers to secure gratuity payments.

Protection Mechanisms:

• Legal right protected under Payment of Gratuity Act
• Priority claim in bankruptcy proceedings
• Gratuity insurance (mandatory in some states)
• Government regulatory oversight
• Employees can file complaints with Labour Commissioner

Q. Within how many days must an employer pay the gratuity amount?

According to the Payment of Gratuity Act, 1972, gratuity payment must be made within 30 days from the date it becomes payable to the employee. If there is a delay beyond 30 days, the employer is liable to pay simple interest on the outstanding gratuity amount until it is settled. Employees should submit their gratuity application within 30 days of the date of retirement, resignation, or when the gratuity becomes due.

Important Timeline:

• Employee Action: Submit gratuity application within 30 days
• Employer Action: Pay gratuity within 30 days of becoming due
• Penalty for Delay: Simple interest on delayed amount
• Employee Remedy: Can approach Labour Commissioner for non-payment
• Typical Payment: Usually paid with full and final settlement

What to do if not paid?

1. Send written reminder to employer
2. File complaint with Assistant Labour Commissioner
3. Send legal notice through advocate
4. Approach Labour Court if necessary

Q: Can gratuity be forfeited or denied?

Yes, gratuity can be forfeited in specific circumstances under the Payment of Gratuity Act, 1972. Employers can deny gratuity if termination is due to the employee’s misconduct involving moral turpitude, such as committing fraud, theft, assault, or engaging in riotous or violent behavior. However, normal resignation, retirement, or termination without cause entitles the employee to full gratuity.

Circumstances for Forfeiture:

• Termination due to moral turpitude (fraud, theft)
• Acts of violence or assault at workplace
• Willful damage to employer’s property
• Riotous or disorderly conduct

Cannot be denied for:

• Normal resignation after 5 years
• Retirement or superannuation
• Layoff or retrenchment
• Company restructuring
• Poor performance (not misconduct)