Gratuity, with the rules nobody reads.
What you are owed under the 15/26 formula, whether you actually cross the eligibility threshold, how much survives tax under Section 10(10) — and twelve provisions that routinely cost people money because neither side knows them.
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How gratuity is calculated
Two different formulas, depending on whether your employer falls under the Act. The difference is not cosmetic — the divisor and the rounding rule both change.
Employees covered by the Act
Employees outside the Act
The divisor moves from 26 to 30, cutting the per-year entitlement by about 13%, and the generous rounding disappears entirely, so 7 years 11 months counts as 7.
Why 26 and not 30
The divisor represents working days in a month, on the basis of a six-day week with four Sundays off. Calculators that divide by 30 understate the payout by roughly 13% — on ₹60,000 basic and 10 years of service that is a ₹46,000 gap. It is worth checking which divisor your employer used.
Tax treatment under Section 10(10)
Government employees are fully exempt with no cap. For everyone else the exemption is the least of three figures: ₹20,00,000, the actual amount received, and the formula amount. The ₹20 lakh is a lifetime ceiling across every employer you have had, so claiming ₹8 lakh at a previous job leaves only ₹12 lakh available.
Anything above the exempt amount is taxable as salary in the year of receipt. Where that pushes you into a higher slab, relief under Section 89 may be available by filing Form 10E before the return.
Twelve rules that quietly cost people money
Gratuity looks like a one-line formula, so almost nobody reads past it. These are the provisions that decide real disputes — including one the Supreme Court changed in 2025 that most published guidance still has wrong.
4 years 7 months is not 5 years
The six-month rounding rule is the most misquoted provision in the Act. It applies only after you have already crossed five years — it rounds 7 years 8 months up to 8, it does not round 4 years 7 months up to 5.
The genuine route below five years is Section 2A: four completed years plus 240 days of service in the fifth year counts as continuous service. That is roughly 4 years 8 months, and several High Courts have upheld it. Employers rarely apply it unless asked.
Section 4(2) & 2A, Payment of Gratuity Act 1972Forfeiture no longer needs a criminal conviction
This changed recently and most guidance online is still wrong. In Western Coal Fields Ltd. v. Manohar Govinda Fulzele (February 2025) the Supreme Court overruled its earlier decision in C.G. Ajay Babu and held that an employer does not need a criminal conviction to forfeit gratuity for an offence involving moral turpitude.
A finding in a properly conducted departmental enquiry is now enough. If you are facing disciplinary proceedings, the gratuity exposure is real and immediate rather than contingent on a court case.
2025 INSC 233, Supreme Court of IndiaForfeiture for damage is capped at the actual loss
Where services are terminated for wilful damage to employer property, forfeiture is limited to the extent of the damage caused. It is not a licence to withhold the whole amount.
Total forfeiture is available only for riotous or disorderly conduct, or an offence involving moral turpitude committed in the course of employment. Poor performance, an unserved notice period and ordinary resignation are none of these.
Section 4(6)(a) & 4(6)(b)Your nomination probably lapsed when you married
If you filed Form F when you had no family, that nomination became void the moment you acquired one. A fresh nomination must be filed, and a nomination in favour of anyone outside your family is void where family exists.
This surfaces at the worst possible time — on a death claim, when the money goes to a legal heir rather than the person you intended. Check the date on your Form F.
Section 6 & Rule 6, Payment of Gratuity Rules 1972The employer must come to you, not the reverse
As soon as gratuity becomes payable the employer is required to determine the amount and give written notice to the employee and the controlling authority — whether or not any application has been made.
Employers routinely treat gratuity as claim-driven. It is not. Failing to issue that notice is itself a default.
Rule 8, Payment of Gratuity Rules 1972A late application does not forfeit your claim
The Rules say expressly that an application made after the prescribed period must still be entertained if there is sufficient cause. Many employees assume that missing the 30-day window ends the matter. It does not.
Claims have been successfully pursued years after separation. The limitation runs on the employer's obligation, not on your paperwork.
Rule 7(5), Payment of Gratuity Rules 1972Late payment carries 10% interest, automatically
Gratuity must be paid within 30 days of becoming payable. Beyond that the employer owes simple interest at the centrally notified rate — currently 10% per annum — without the employee having to ask for it.
The only escape is where the delay is due to the employee's own fault and the employer has obtained written permission from the controlling authority.
Section 7(3A)The new wage definition can increase your gratuity
Under the Code on Social Security 2020, if the allowances excluded from ‘wages’ exceed 50% of total remuneration, the excess is added back into wages.
For anyone on a low basic with large allowances — a very common Indian salary structure — this raises the gratuity base above the old Basic + DA figure. Employers restructuring CTC to suppress gratuity liability no longer get the same benefit.
Section 2(88), Code on Social Security 2020Fixed-term staff qualify after one year
The five-year threshold does not apply to fixed-term employment. A fixed-term employee becomes entitled on a pro-rata basis after one year, whether the term expired or they resigned.
Contract and project staff are often told they are ineligible. Since the labour codes were brought into force in November 2025, that is no longer correct.
Section 53(2), Code on Social Security 2020Most employers must hold gratuity insurance
Every employer other than government must obtain compulsory insurance for their gratuity liability, or establish an approved gratuity fund. Only establishments with 500 or more employees running an approved fund are exempt.
Small and mid-sized employers overwhelmingly ignore this, which is precisely why unfunded gratuity liabilities surface as a nasty surprise during due diligence.
Section 57, Code on Social Security 2020Gratuity cannot be held hostage
An employer cannot withhold gratuity because you have not vacated company accommodation, not returned assets, or not completed exit formalities. The Act permits withholding only on the specific forfeiture grounds.
Nor can gratuity be attached in execution of any decree. It is protected.
Section 13; Air India Ltd. v. Appellate AuthorityBreaks in service do not break continuity
Continuous service is not the same as unbroken attendance. Absence due to sickness, accident, authorised leave, lay-off, a legal strike or a lock-out counts towards your service.
The working test is 240 days in a twelve-month period — reduced to 190 days for below-ground work or a week of fewer than six working days.
Section 2AQuestions people ask
What is the formula for calculating gratuity?
For employees covered by the Payment of Gratuity Act 1972, gratuity equals last drawn basic pay plus dearness allowance, multiplied by 15, multiplied by years of service, divided by 26. The 26 represents working days in a month rather than calendar days, so using 30 understates the payout by about 13%. Only basic and DA enter the formula; HRA, bonus and other allowances are excluded.
Does 4 years and 7 months count as 5 years?
No, and this is the most common misconception about the Act. The six-month rounding rule applies only after five years of continuous service has already been completed, so it turns 7 years 8 months into 8 years but does not turn 4 years 7 months into 5. The genuine route below five years is Section 2A, under which four completed years plus 240 days of service in the fifth year counts as continuous service.
Can my employer forfeit my gratuity without a criminal conviction?
Yes, since February 2025. In Western Coal Fields Ltd. v. Manohar Govinda Fulzele the Supreme Court overruled its earlier decision in C.G. Ajay Babu and held that a conviction is not required to forfeit gratuity for an offence involving moral turpitude. A finding in a properly conducted departmental enquiry is sufficient. Forfeiture for damage to employer property remains capped at the extent of the damage.
How much gratuity is tax-free?
For government employees gratuity is fully exempt with no cap. For private sector employees covered by the Act, the exemption under Section 10(10) is the least of Rs 20,00,000, the actual gratuity received, and the amount produced by the formula. The Rs 20,00,000 is a lifetime ceiling across all employers rather than per job, so any exemption claimed earlier reduces what remains.
Do I have to apply for gratuity?
No. Rule 8 requires the employer to determine the amount and give written notice to the employee and the controlling authority as soon as gratuity becomes payable, whether or not any application has been made. Separately, a late application cannot be rejected on delay alone where there is sufficient cause.
What if my employer pays late?
Gratuity must be paid within 30 days of becoming payable. Beyond that the employer owes simple interest at the centrally notified rate, currently 10% per annum, without the employee having to claim it. The only exception is where the delay is due to the employee's own fault and the employer has obtained written permission from the controlling authority.
Are fixed-term and contract employees eligible?
Fixed-term employees become entitled on a pro-rata basis after one year under the Code on Social Security 2020, without needing five years. This applies whether the term expired or the employee resigned. Since the labour codes were brought into force in November 2025, being told that contract staff are simply ineligible is no longer correct.
Can my employer withhold gratuity until I vacate company accommodation?
No. Gratuity may be withheld only on the specific forfeiture grounds in Section 4(6). Failure to vacate accommodation, return assets or complete exit formalities is not among them, and courts have held such withholding to be impermissible. Gratuity is also protected from attachment in execution of any decree.