Gratuity in India: Eligibility, Formula, Tax Rules (2026)

You're entitled to gratuity after 5 years of service. Learn the formula, the ₹20 lakh tax-free cap, and what happens if you're terminated.

1.Eligibility and the 5-year rule

Under the Payment of Gratuity Act, 1972, you're eligible for gratuity after **completing 5 years of continuous service**. The Supreme Court has clarified that 4 years and 240 days counts as 5 years (Surendra Kumar Verma case). Applies to all establishments with 10+ employees. Even contractual employees are eligible if they complete 5 years. Exception: gratuity is payable regardless of tenure in case of death or disability.

2.The gratuity formula

For employees covered under the Act: **Gratuity = Last drawn basic salary × 15 × Years of service ÷ 26**. "15" represents 15 days of salary. "26" represents working days in a month. Example: basic salary ₹80,000/month, 10 years of service. Gratuity = ₹80,000 × 15 × 10 ÷ 26 = **₹4,61,538**. For non-covered employees (management cadre in some firms): Gratuity = basic × 15 × years ÷ 30 (half-month salary per year).

3.Tax treatment of gratuity

For **government employees**: gratuity is fully tax-free. For **private sector** employees covered under the Act: tax-free up to the **least** of: (1) ₹20 lakh, (2) actual gratuity received, (3) formula amount. Any amount above ₹20 lakh is taxed at slab rate. Example: you're eligible for ₹25 lakh gratuity. ₹20 lakh is tax-free. ₹5 lakh is added to your income for that year. At 30% slab: ₹1.56 lakh tax on gratuity.

4.What if you resign vs get terminated?

Resignation: you get full gratuity if you've completed 5 years, regardless of reason for leaving. Termination: you still get gratuity even if terminated — unless the termination is for specific misconduct (causing damage to employer property, moral turpitude). Many employees don't know this and don't claim. Your employer must pay gratuity within 30 days of it becoming payable. Delay attracts interest at 10% per annum.

5.Key takeaway

Gratuity is a legal right after 5 years of service — claim it regardless of how you leave. The ₹20 lakh tax-free exemption makes it one of the most tax-efficient components of your terminal benefits. Use our gratuity calculator to estimate your exact gratuity based on your current basic salary and tenure.