Gratuity Calculator — Amount & Tax Exemption u/s 10(10)
Gratuity is a lump-sum reward an employer pays for long service, payable on retirement, resignation, superannuation, death or disablement after at least five years of continuous service. The amount depends on whether the employer is covered by the Payment of Gratuity Act 1972, and the tax treatment depends on whether you are a government employee. This calculator handles all three cases and shows the exempt and taxable portions.
Formula — covered under the Act
Gratuity = (15 ÷ 26) × last drawn Basic + DA × completed years of service. Any fraction of a year of six months or more is rounded up to a full year. The divisor 26 represents working days in a month; 15 days' wages are paid per year.
Formula — not covered under the Act
Gratuity = ½ × average salary of the last 10 months × completed years of service. Fractions of a year are ignored.
Tax exemption
- Government employees (Central, State, local authority): fully exempt.
- Others: exempt up to the least of (a) gratuity actually received, (b) the formula amount above, and (c) ₹20,00,000 — a lifetime limit across all employers.
Any excess is taxable as salary in the year of receipt; relief u/s 89 may be claimed. The exemption is available in both the old and new regimes.
Worked example
Last drawn Basic + DA ₹50,000; service 12 years 7 months with a company covered under the Act. Years counted = 13 (7 months rounds up). Gratuity = 15/26 × 50,000 × 13 = ₹3,75,000. This is below ₹20 lakh and equals the formula amount, so it is fully exempt. If the employer had voluntarily paid ₹5,00,000, the extra ₹1,25,000 would be taxable.
Points to remember
- Minimum 5 years of continuous service is waived in case of death or disablement; 4 years 240 days is accepted by several High Courts.
- Employers with 10 or more employees are covered under the Act; the Act's ceiling for the payable amount is also ₹20 lakh, though an employer may pay more.
- Gratuity must be paid within 30 days of becoming due, failing which interest is payable.
Frequently Asked Questions
How many years of service are needed for gratuity?
Five years of continuous service with the same employer, except in case of death or disablement. Several courts have held 4 years and 240 days in the fifth year as sufficient for establishments covered by the Act.
Is gratuity fully tax free?
For government employees, yes. For others it is exempt up to the least of the amount received, the statutory formula amount and ₹20 lakh (lifetime aggregate). Anything above is taxed as salary.
Why is gratuity divided by 26 and not 30?
The Payment of Gratuity Act treats a month as 26 working days (excluding weekly offs), so 15 days' wages per year is computed as 15/26 of the monthly wage.
Does gratuity include allowances?
No. Only Basic pay and Dearness Allowance (plus commission at a fixed percentage of turnover) are considered; HRA, conveyance and other allowances are excluded.
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.