Gratuity Formula, Eligibility, Ceilings and Example
Understand gratuity eligibility, the 15/26 formula, worked examples, and why payment ceiling and income-tax exemption ceiling are not the same thing.
Direct answer
A common gratuity formula is last drawn basic salary × 15/26 × completed years of service. Eligibility generally requires five years of continuous service, subject to exceptions. Payment ceiling and tax-exemption ceiling must be considered separately and verified from current official sources.
Formula
GRATUITY
Last drawn basic × 15 ÷ 26 × completed years
Example
If last drawn basic salary is ₹60,000 per month and completed service is 7 years:
₹60,000 × 15/26 × 7 = ₹2,42,308 approximately.
For high salary and long service, the calculator also shows the formula amount before applying the common statutory payment ceiling used as a planning assumption.
Payment ceiling vs tax exemption
Do not merge these two concepts. The payment ceiling affects the maximum amount an employer may be required to pay under applicable gratuity law. The income-tax exemption ceiling affects whether any gratuity received is taxable. Both can change and should be verified from official sources or a CA.
Eligibility exceptions
Five years is a common threshold, but exceptions can apply in cases such as death or disablement. Your employment terms, employer type and applicable Act matter.
Source: Ministry of Labour & Employment and Income Tax Department. Last reviewed: 24 August 2026.
Article FAQ
Is gratuity always tax-free?
No. Tax treatment depends on the applicable exemption limit, employer type and current tax law. Verify with a CA.
What salary is used for gratuity?
This calculator uses last drawn basic salary. Your actual terms may include DA or other qualifying components.
Is 4.8 years rounded to 5 years?
Rounding and eligibility rules can depend on applicable law and court interpretations. The calculator uses completed years.
Run the numbers yourself
Use the free SmartFintool calculators to apply this guide to your own money.