Gratuity Eligibility Calculator — Payment of Gratuity Act, 1972
Gratuity Eligibility — The 4 Years 240 Days Rule
Under Section 2A of the Payment of Gratuity Act, 1972, an employee is considered to have completed one year of continuous service if they have worked for at least 240 days in that year (190 days for mine workers). This means the effective threshold for gratuity is:
- 4 complete years + 240 days in the 5th year ≈ 4 years and 8 months total
- If the last year has ≥ 6 months (183+ days), it rounds up to a full year for the formula
The Gratuity Formula — Section 4(2)
For employees covered under the Act:
Gratuity = (15 ÷ 26) × Last Drawn Monthly Salary × Completed Years
The divisor 26 represents the number of working days per month (excluding Sundays). The numerator 15 represents the half-month's salary the Act prescribes per year of service.
For employees not covered under the Act (fewer than 10 employees), employers often use 15/30 (half of a 30-day month) by convention — though there is no statutory compulsion to pay gratuity at all.
Maximum Gratuity & Tax Exemption — Section 10(10)
The tax-free ceiling on gratuity was raised to ₹20 lakh by a notification in 2019. Under Section 10(10) of the Income Tax Act:
- Government employees: Entire gratuity is exempt from income tax
- Covered under Gratuity Act: Least of — (a) actual gratuity received, (b) formula amount, (c) ₹20 lakh
- Not covered under Gratuity Act: Least of — (a) actual gratuity, (b) half month's average salary × years, (c) ₹20 lakh
Any amount above the exempt ceiling is added to taxable income for that year.
Gratuity on Death or Disablement
The minimum service threshold of 4 years 240 days does not apply in case of death or permanent disablement. The nominee/legal heir receives the gratuity even if the employee had just joined.
Worked Example
| Parameter | Value |
|---|---|
| Total Service | 8 years 7 months → 9 completed years |
| Last Monthly Basic + DA | ₹50,000 |
| Employer Type | Covered under Gratuity Act |
| Gratuity = (15/26) × 50,000 × 9 | ₹2,59,615 |
| Tax Exempt (below ₹20 lakh ceiling) | ₹2,59,615 (fully exempt) |
Frequently Asked Questions
Does the 5-year rule apply if I resign?
Yes. Gratuity is payable on resignation, provided you have completed at least 4 years and 240 days of continuous service. The minimum service requirement applies regardless of the reason for leaving — resignation, retirement, retrenchment, or death/disablement (except that death/disablement waives the service requirement entirely).
What counts as "salary" for the gratuity formula?
Under the Payment of Gratuity Act, "salary" for the formula means only the Basic Salary + Dearness Allowance. HRA, medical allowance, bonus, overtime pay, commission, and other allowances are excluded. This is a common source of discrepancies between employee expectations and employer calculations.
Can an employer refuse to pay gratuity?
An employer cannot withhold gratuity except in case of termination for willful omission or negligence causing loss to the employer (Section 4(6)(b)). Even in termination for misconduct, the employer cannot forfeit the entire gratuity — only the portion proportionate to the loss caused. Forfeiture is not automatic; it must follow due process.
Is gratuity taxable in the hands of the employee?
Gratuity is partially or fully exempt from income tax under Section 10(10) of the Income Tax Act. Government employees get full exemption. For employees covered under the Gratuity Act, the exemption is the least of: actual gratuity received, the formula amount (15/26 × salary × years), and ₹20 lakh. Any excess is taxable as salary income in the year of receipt.
My company has fewer than 10 employees. Am I entitled to gratuity?
The Payment of Gratuity Act technically applies only to establishments with 10 or more employees. However, once an establishment crosses this threshold, the Act continues to apply even if employee count later drops below 10. If your employer has always had fewer than 10 employees, there is no statutory entitlement — but many employers voluntarily pay gratuity as per the formula as a good practice or per contractual terms.
When must the employer pay gratuity?
Gratuity must be paid within 30 days of it becoming payable (Section 7(3)). If there is a delay, the employer must pay simple interest at the rate notified by the government from the date it became payable. An employee can file a claim with the Controlling Authority (usually the Labour Commissioner) if the employer fails to pay.
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Indicative Methodology & Fact-Check: This calculator is based on Section 2A and Section 4(2) of the Payment of Gratuity Act, 1972, and Section 10(10) of the Income Tax Act, 1961. Results are indicative and for informational purposes only. This does not constitute legal or financial advice. Actual gratuity entitlement depends on your employment contract, applicable state amendments, and specific facts. Consult a labour law advocate or HR professional for disputes or complex cases.