What is Gratuity?
Gratuity is a financial reward given by an employer to an employee in recognition of their long-term service. It is governed by the Payment of Gratuity Act, 1972. While many think it's a "bonus," it is actually a statutory benefit that companies with 10 or more employees must provide.
The 5-Year Continuity Rule
To be eligible for gratuity, you must have completed at least 5 years of continuous service with the same employer.
The "4 Years 240 Days" Exception:
Court rulings have clarified that if you have completed 4 years and 190 days (in a 5-day week) or 240 days (in a 6-day week), you may still be eligible for gratuity. However, most HR departments strictly look for the 5-year mark on your Relieving Letter.
The Calculation Formula
The math is based on your "Last Drawn Basic Salary + DA" and the "Years of Service":
Gratuity = (Last Basic + DA) × (15/26) × Years
Why 26? Because the act considers 4 days of rest in a month.
Taxation: Is it really 'Free' money?
Under Section 10(10) of the Income Tax Act:
- Government Employees: Entire gratuity amount is 100% tax-free.
- Private Sector Employees: Tax-free up to a limit of ₹20 Lakhs (as per latest notification). Any amount above this is added to your income and taxed at your slab.
Pro Tip: Month Rounding
"6 is more than 5." If you serve for 6 years and 7 months, for the purpose of gratuity, it is rounded up to **7 years**. If you serve for 6 years and 5 months, it is rounded down to **6 years**. If you're planning to resign, check your joining date—staying just one extra month could earn you an extra year's worth of gratuity!
Calculate Your Payout
Don't wait for your final settlement to know your numbers. Use our accurate calculator to see your exact gratuity entitlement.
Ashu Yadav
Senior Associate EngineerAshu Yadav is a Senior Associate Engineer at CalcGuide, specializing in financial software architecture and precision-math implementations. With over 6 years of experience in full-stack development and algorithmic design, he leads the technical strategy for CalcGuide's suite of 50+ financial tools. His focus is on making complex Indian taxation and investment rules accessible through clean code and user-centric design.