Gratuity — the formula, the 4-year-8-month rule, and the tax cap
A benefit most employees only think about on their last day, when the eligibility rule has already been decided by their resignation date.
Gratuity is a statutory payment for continuous service, and it is one of the few benefits where a few weeks of timing can change the amount from a full payout to zero.
The formula
Gratuity = (Last drawn salary × 15 × years of service) / 26"Salary" here means basic pay plus dearness allowance, not the total package. The 26 is a notional count of working days in a month, so the formula effectively pays 15 days of salary for each completed year.
On a basic of ₹50,000 with 10 years of service: (50,000 × 15 × 10) / 26 = ₹2,88,461.
The eligibility rule that catches people
Five years of continuous service is required. But service beyond four years is rounded up when the final year exceeds six months — which in practice means four years and eight months or more usually qualifies, while four years and five months does not.
The gap between those two dates can be worth several lakh rupees, and it is entirely within your control if you know about it before you resign.
Where the five years is waived
The service condition does not apply where employment ends due to death or disablement. In those cases gratuity is payable regardless of tenure, and it is paid to the nominee — which is a good reason to make sure a nomination exists on file.
Taxation
Gratuity received by employees is exempt up to a statutory ceiling, applied cumulatively across your working life rather than per employer. Amounts above the ceiling are taxable as salary income.
The cumulative point catches people who receive gratuity twice: the exemption is not refreshed at the second employer.
What counts as continuous service
Notice period generally counts. Approved leave counts. A gap between employers does not, and service does not carry across employers — each employment stands on its own for the five-year test. This is different from EPF, where the clock does carry over on transfer.
Calculate yours
Two practical notes
It is not deducted from your salary. Unlike EPF, gratuity is funded entirely by the employer. If your CTC shows a gratuity line, that is an accounting presentation of the employer's cost, not money withheld from you — though it does mean your stated CTC includes an amount you only receive after five years.
Payment has a statutory deadline. Employers are required to pay within a defined window after the last working day, with interest payable on delay. Non-payment is a specific violation with a specific remedy, not a matter of company policy.
Where these figures come from
- Employees' Provident Fund Organisation — EPF and VPF rates, contribution rules and withdrawal conditions
Published by FinClamp. This guide is information, not financial advice — see the disclaimer.