How to Calculate Gratuity in India
Formula, Examples & Step-by-Step Guide
Gratuity = (Basic ÷ 26) × 15 × Years of Service. This page explains every part of this formula — why 26, why 15, how years are rounded — with real step-by-step examples for every salary range.
The Gratuity Formula — Payment of Gratuity Act 1972
Gratuity = (Basic ÷ 26) × 15 × Years of Service
Basic ÷ 26
Daily Basic Wage
26 = working days in a month (excludes 4 Sundays). Dividing by 26 gives your daily Basic wage rate.
× 15
15 Days Per Year
The Act entitles you to 15 days of Basic salary for each year of continuous service with the employer.
× Years
Completed Years
Total years from joining to leaving. Fractions of 6+ months round up to the next full year.
What Counts as "Basic Salary" in the Gratuity Formula?
The gratuity formula uses last drawn Basic Salary + Dearness Allowance (DA). Most private sector companies do not pay DA separately — so in practice, only Basic Salary is used.
✅ Included in Gratuity Base
- ✓ Basic Salary
- ✓ Dearness Allowance (DA)
- ✓ Commission on sales (if fixed %)
❌ Excluded from Gratuity Base
- ✗ House Rent Allowance (HRA)
- ✗ Special Allowance
- ✗ Overtime pay
- ✗ Bonus
- ✗ Medical Allowance
- ✗ Conveyance Allowance
📌 New Labour Code Impact on Basic
Under the new Labour Code (effective Nov 21, 2025), Basic must be ≥ 50% of total wages. A higher Basic directly increases the gratuity calculation base — resulting in a larger payout for the same CTC and years of service.
How Years of Service Are Rounded — The 6-Month Rule
6 Months or More → Count as 1 Full Year
If your remaining months after full years are 6 months or more, that fraction is rounded up to 1 full year.
Example: 5 years 8 months → counted as 6 years
Less Than 6 Months → Ignored
If the remaining months are less than 6 months, that fraction is dropped entirely.
Example: 5 years 4 months → counted as 5 years
| Date of Joining | Date of Leaving | Actual Service | Years Counted | Reason |
|---|---|---|---|---|
| Jan 1, 2018 | Aug 15, 2025 | 7 years 7.5 months | 8 years | 7.5 months > 6 months → round up |
| Mar 1, 2019 | Jun 10, 2025 | 6 years 3 months | 6 years | 3 months < 6 months → ignore |
| Jul 1, 2020 | Jan 15, 2026 | 5 years 6.5 months | 6 years | 6.5 months ≥ 6 months → round up |
| Apr 1, 2021 | Nov 30, 2025 | 4 years 8 months | 5 years | 8 months > 6 months → round up |
Step-by-Step Gratuity Calculation — Every CTC Range
Based on new Labour Code structure. Basic = 50% of monthly CTC. Formula: (Basic ÷ 26) × 15 × Years.
₹3,00,000 Annual CTC
₹25,000/month
Basic Salary Used
₹12,500 (50% of CTC — new Labour Code)
Calculation Steps
Gratuity Payout by Tenure
1 Year
₹7,212
New Labour Code only
5 Years
₹36,058
Min old law
10 Years
₹72,115
15 Years
₹1,08,173
₹6,00,000 Annual CTC
₹50,000/month
Basic Salary Used
₹25,000 (50% of CTC — new Labour Code)
Calculation Steps
Gratuity Payout by Tenure
1 Year
₹14,423
New Labour Code only
5 Years
₹72,115
Min old law
10 Years
₹1,44,231
15 Years
₹2,16,346
₹10,00,000 Annual CTC
₹83,333/month
Basic Salary Used
₹41,667 (50% of CTC — new Labour Code)
Calculation Steps
Gratuity Payout by Tenure
1 Year
₹24,038
New Labour Code only
5 Years
₹1,20,192
Min old law
10 Years
₹2,40,385
15 Years
₹3,60,577
₹12,00,000 Annual CTC
₹1,00,000/month
Basic Salary Used
₹50,000 (50% of CTC — new Labour Code)
Calculation Steps
Gratuity Payout by Tenure
1 Year
₹28,846
New Labour Code only
5 Years
₹1,44,231
Min old law
10 Years
₹2,88,462
15 Years
₹4,32,692
₹15,00,000 Annual CTC
₹1,25,000/month
Basic Salary Used
₹62,500 (50% of CTC — new Labour Code)
Calculation Steps
Gratuity Payout by Tenure
1 Year
₹36,058
New Labour Code only
5 Years
₹1,80,288
Min old law
10 Years
₹3,60,577
15 Years
₹5,40,865
🔒 Maximum Gratuity Cap — ₹20 Lakh
Under the Payment of Gratuity Act 1972, the maximum gratuity payable is capped at ₹20,00,000 (₹20 lakh). Even if the formula produces a higher number, the statutory maximum is ₹20 lakh.
Statutory Cap
₹20 Lakh
Maximum under Payment of Gratuity Act 1972
Tax-Free Limit
₹20 Lakh
Under Section 10(10) Income Tax Act — same as cap
Above Cap
Employer Choice
Employers can pay more voluntarily — taxable above ₹20L
When does the ₹20 lakh cap kick in?
For ₹15 LPA CTC at Basic ₹62,500/month — gratuity reaches ₹20 lakh after approximately 22.2 years of service. Most employees in India retire before hitting this cap.
5 Common Gratuity Calculation Mistakes to Avoid
❌ Using Gross Salary instead of Basic
✅ Always use only Basic Salary + DA. HRA, Special Allowance, Bonus are excluded from the calculation base.
Impact: Overestimates gratuity significantly
❌ Dividing by 30 instead of 26
✅ The formula uses 26 working days per month — not 30 calendar days. Using 30 gives a lower (incorrect) result.
Impact: Underestimates daily wage rate
❌ Ignoring the 6-month rounding rule
✅ Always round up if remaining months ≥ 6. Example: 4 years 7 months = 5 years for gratuity, not 4.
Impact: Causes employees to undercount their tenure
❌ Using old Basic (pre-Labour Code)
✅ Under the new Labour Code (Nov 2025), Basic must be ≥ 50% of wages. Use updated Basic for accurate calculation.
Impact: Underestimates gratuity by 20–25%
❌ Assuming gratuity is deducted from salary
✅ Gratuity is an employer cost — provisioned at 4.81% of Basic per month by the company. It is never deducted from your pay slip.
Impact: Causes unnecessary concern about take-home
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Frequently Asked Questions
What is the formula to calculate gratuity in India?▼
Gratuity = (Basic Salary ÷ 26) × 15 × Years of Service. Use last drawn Basic + DA. 26 = working days per month. 15 = days of Basic per year of service. Years are rounded — 6+ months counts as 1 full year.
Why is 26 used in the gratuity formula and not 30?▼
26 represents the working days in a month under the Payment of Gratuity Act 1972. A month has approximately 26 working days (4 weeks × 6 working days + 2 days = ~26). Dividing by 26 gives the daily Basic wage rate. Using 30 would incorrectly reduce the daily rate.
How are years of service counted for gratuity?▼
Count full years from joining to leaving date. Any fraction of a year that is 6 months or more counts as 1 full year. Less than 6 months is ignored. For example: 7 years 8 months = 8 years. 7 years 3 months = 7 years.
What is the maximum gratuity in India?▼
The statutory maximum gratuity under the Payment of Gratuity Act 1972 is ₹20 lakh (₹20,00,000). This is also the tax-free exemption limit under Section 10(10) of the Income Tax Act. Employers can voluntarily pay more — amounts above ₹20 lakh are taxable.
Does HRA count in gratuity calculation?▼
No. HRA (House Rent Allowance) is excluded from the gratuity calculation base. Only Basic Salary + Dearness Allowance (DA) is used. Other excluded components: Special Allowance, Bonus, Medical Allowance, Conveyance Allowance, Overtime pay.