Quick Answer: How Much Gratuity Will You Receive?
If your last drawn Basic Salary (plus Dearness Allowance) is ₹60,000 per month and you resign or retire after 8 years of service in an establishment covered by the Gratuity Act, your statutory gratuity payout is exactly ₹2,76,923. Because this payout is well within the ₹20,00,000 statutory exemption limit under Section 10(10) of the Income Tax Act, you pay zero rupees in income tax on this entire amount. You can calculate your exact gratuity entitlement in seconds with our [Gratuity Calculator](/gratuity-calculator).
The Statutory Gratuity Formula Explained
For employees covered under the Payment of Gratuity Act, 1972 (any commercial organization with 10 or more employees), gratuity is calculated using this statutory formula: Gratuity = (15 × Last Drawn Basic + DA × Number of Completed Years of Service) / 26 Why divide by 26 instead of 30? The law calculates your daily wage by dividing your monthly salary by 26 working days (excluding 4 Sundays in a calendar month). You are entitled to 15 working days of salary for every full year of service.
Worked Example: 7 Years and 8 Months of Service
Let us run a real-world calculation for a senior software engineer leaving an organization: • Last Drawn Basic Salary: ₹75,000/month • Dearness Allowance: ₹0 • Total Eligible Monthly Wage: ₹75,000 • Total Service Duration: 7 years and 8 months Step 1: Rounding of Tenure Under Section 4(2) of the Act, any service fraction exceeding 6 months rounds up to the next full year. Therefore, 7 years and 8 months is officially treated as 8 completed years. Step 2: Apply the Formula Gratuity = (15 × ₹75,000 × 8) / 26 Gratuity = ₹90,00,000 / 26 = ₹3,46,154 Step 3: Tax Evaluation Since ₹3,46,154 is below the ₹20,00,000 statutory limit under Section 10(10), the employer disburses the entire ₹3,46,154 without any TDS deduction.
The 5-Year Eligibility Rule: Is 4 Years and 240 Days Enough?
Under Section 4(1) of the Act, gratuity becomes payable only upon completion of at least 5 years of continuous service. However, Indian courts and high court rulings have repeatedly upheld that under Section 2A ("continuous service"), an employee who completes 240 working days in their fifth year (or 190 days in a 5-day work week establishment) satisfies the continuous service criteria, making them eligible for gratuity at approximately 4 years and 190 to 240 days. Note: The 5-year requirement is completely waived if termination occurs due to employee death or permanent disability.
Tax Exemption Limits: Private vs Government Employees
The tax treatment of gratuity under Section 10(10) of the Income Tax Act operates as follows: • Central and State Government Employees: 100% of gratuity received is tax-free without any upper rupee ceiling. • Private Sector Employees Covered under Gratuity Act: Tax-free up to the statutory ceiling of ₹20,00,000 across your entire working lifetime. Any excess received above ₹20 Lakh is added to your income and taxed at normal slab rates. • Private Sector Employees Not Covered under the Act: Formula uses 30 days divisor instead of 26: Gratuity = (15 × Half Month Average Salary × Tenure) / 30, with the same ₹20 Lakh tax-free cap.