GRATUITY: How to Calculate, Formula, Eligibility & Tax Exemption for 2026 with Downloadable Calculator

What Is Gratuity?

Gratuity is given to you by your employer for your services. It is paid by both public and private sector employers.

Gratuity is a key component of employee benefits in India and plays an important role in long-term financial planning and retirement corpus creation.

What is 4.81% in gratuity?

Gratuity is included in your salary as a Cost to the Company (CTC). It is 4.81% of the basic salary.

Many employees often ask how gratuity in CTC is calculated and why gratuity percentage in salary is fixed at 4.81% of basic pay.

Why gratuity is 4.81%?

Gratuity is paid for being associated with the company for a long time. 4.81% is what mentioned in the Gratuity Act.

The logic behind 4.81% of Gratuity is

Let us assume an employee’s basic pay is Rs.100/-

Gratuity eligibility per annum is the recent basic pay / 26 * 15

So the gratuity calculation for him is = 100 /26 * 15 = 57.69231

Therefore, for one month = 57.69231 / 12 = 4.81 per month

Understanding why gratuity is 4.81 of basic salary helps decode how employers structure salary and gratuity contribution percentage in CTC.

Table of Contents

• • Are you eligible for a Gratuity?
  • How is the five years’ service calculated?
  • What is continuous service?
  • To whom gratuity is payable?
  • When is the Gratuity payable?
  • Calculation of Gratuity
  • Gratuity Act 1972
  • Tax exemptions on Gratuity
  • What if you are unable to complete five years of service due to death or disablement?
  • How gratuity is calculated in case of death?
  • When is gratuity not paid?
  • What are the gratuity payment rules?
  • New Gratuity Rules 2026 – Latest Updates Under Labour Codes
  • What forms are to be used in gratuity?
  • Employers have a right to forfeit gratuity
  • Conclusion

What is the gratuity eligibility?

Discover if you are eligible for 4.81% gratuity.

If your company’s employees are more than 10 and if you complete a minimum of 5 years of continuous service, then you are eligible to receive gratuity as 4.81% of the basic salary

Once employee strength reaches 10, then even if it reduces later, you will be eligible.

Temporary staff, contract workers, etc., are also eligible as long as they are considered employees. However, apprentices will not be eligible.

If you are transferred overseas on an assignment, you will still be eligible for 4.81% Gratuity.

Gratuity eligibility in India depends on minimum service period, company size, and applicability of the Payment of Gratuity Act 1972.

How is the five years’ service calculated for Gratuity?

Find out what these 5 years mean.

You should have worked for 190 days out of 365 days in case you work below the ground.

All mining activities fall under this. In case you work above the ground, you should have worked for 240 days out of 365 days.

Gratuity eligibility period calculation is crucial, especially under new gratuity rules and labour law updates.

What is continuous service?

Any disturbance in employment due to the following reasons will not affect you and you will be deemed to be in continuous service. They include:

• Sickness
• Accident
• Leave
• Layoff
• Strike
• Lockout
• Termination of work not due to your fault

Continuous service definition under gratuity rules ensures employees are protected even during layoffs, leave, or temporary disruptions.

To whom gratuity rate of 4.81% is payable?

Do you think only employees are paid gratuity? See who is in this list

1) Employee
2) Nominee or heir: In case of death, it is paid to the nominee and if no nomination is made it is paid to the heir.

3) Controlling authority: If the nominee or heir is minor then it is deposited with controlling authority who will invest in the bank or other financial institution, as may be prescribed until the such minor becomes major.

Employee gratuity is payable not only to employees but also to nominees or legal heirs in case of death.

When is the Gratuity payable?

When do you think gratuity is paid? It can be paid during any of the following:

        ✔ Resignation
        ✔ Retirement
        ✔ Voluntary Retirement Scheme (VRS)
        ✔ Retrenchment lay off
        ✔ Disability or death due to disease or accident

Gratuity payment rules specify timelines and conditions for payout during resignation, retirement, or termination

How gratuity of 4.81% calculated?

How to calculate retirement gratuity?

You can calculate the gratuity of 4.81% payable using the below steps.

What are the factors that gratuity depends on? Gratuity of 4.81% calculation is based on two factors.

Gratuity depends on:

             Last drawn salary
             Years of service    

If you want to know, what is the gratuity calculation 2026? 0r

How to calculate gratuity in 2026?,  then

you can use our Gratuity Calculator for the gratuity of 4.81%.

Click here to download your Gratuity Calculator!

Gratuity Act 1972

Have you heard of the Payment of Gratuity Act 1972?

This Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and such establishments that have more than 10 employees.

They have divided non-government employees into two:

• ⭐️ Employees covered under the Act
  ⭐️ Employees not covered under the Act

Are you covered under the Gratuity Act 1972? Check out if you are covered.

You will be covered under the Gratuity Act 1972, if the organization employs at least 10 people on a single day in the preceding 12 months. If an organization falls under this Act, then it will always remain covered even if the number of employees falls below 10.

Find how gratuity 4.81% is calculated for Employees covered under the Act.

⭐️ Employees covered under the Act

The Gratuity Formula is as follows

Here are the frequently asked questions regarding the gratuity calculation.

How to calculate gratuity in salary?

How is gratuity calculated in CTC?

What is the gratuity calculator formula for private employees?

What is the formula for gratuity in India?

What is the central government gratuity calculation formula?

The answer to all the above gratuity related question is in the simple formula below.

Gratuity = (Last drawn salary X no.of completed years of service X 15) / 26

This gratuity formula explains what is 15/26 in gratuity calculation and how working days’ impact final pay-out.

What is 15/26 in gratuity calculation?

(Last drawn salary X no.of completed years of service X 15) / 26

The last drawn salary includes basic salary, dearness allowance, and commission on sales.

26 is the number of your working days in a month.

Example: Mr. A’s last drawn salary is Rs.80,000 per month and he has worked with ABC Ltd for 20 years and 7 months.

(15 X 80,000 X 21)/26 = Rs. 9.69 lakh

Here we take 21 years as Mr. A has worked for more than 6 months in a year, i.e. 20 years and 7 months.

For the no. of months in the last year of employment, anything above 6 months is rounded off to the next number and anything below 6 months is rounded off to the actual no. of years not taking the months. So a job for 6 years and 7 months will fetch you 7 years’ gratuity, and a job for 6 years and 4 months will fetch you 6 years gratuity.

You can calculate the gratuity 4.81% by using our gratuity calculator.

Download the Gratuity Calculator Here!

Now find how gratuity is calculated for Employees not covered under the Act

⭐️ Employees not covered under the Act

The Gratuity Formula is as follows:

What is the formula for gratuity in India for the employees not covered under the Gratuity Act 1972?

Gratuity= (Last 10 months average salary X no.of completed years of service X 15)/30

Salary includes basic, dearness allowance and commission on sales.

In the above example, If Mr. A’s organization was not covered under the Act, then

(15 X 80,000 X 20)/30 = Rs.8,00,000

Here the no. of years is taken based on each completed year. A has worked with the company for 20 years and 7 months. Then A’s working period is 20, not 21.

Calculate your Gratuity Here!

Gratuity calculation for employees not covered under the gratuity act follows a different formula using 30 days instead of 26.

Tax exemptions on 4.81% Gratuity

Do you know there are Tax Exemptions on Gratuity 4.81%? Yes, there are Exemptions. Calculate how much you are exempt from tax.

Gratuity tax exemption limits and rules vary for government and private employees, making tax planning essential.

What is the gratuity formula for government employees?

Will the Government employees receive Gratuity of 4.81%?

Government employees receiving Gratuity

In case an employee under the state government, central government, local authority, or defence receives gratuity during death or retirement, it is fully exempt from tax.

A private employee receiving gratuity from an employer who is covered by the Payment of Gratuity Act 1972

The least of this is exempt from tax

• Rs.20,00,000
• Gratuity received
• Salary last drawn × Number of completed years of services × 15/26

A private employee receiving gratuity from an employer who is not covered by the Payment of Gratuity Act

The least of this is exempt from tax

• Rs.10,00,000
• Gratuity received
• Last 10 months’ average salary × Number of completed years of services × ½

Government gratuity calculation follows different exemption rules and higher limits compared to private sector employees.

Is gratuity calculated before or after tax?

The gratuity is calculated after tax.

Gratuity tax treatment depends on exemption eligibility and is an important factor in financial planning.

What if you are unable to complete five years of service due to death or disablement?

You will be given a gratuity as if you have completed five years.

You will be deemed to have completed five years but gratuity will be calculated on the number of years completed and not on five years.

It is paid to you or your legal heir as the case may be, irrespective of the no. of years of continuous service.

Gratuity received by the legal heir is exempt from tax.

Gratuity rules in case of death or disability ensure financial support to family members even without minimum service completion.

How gratuity is calculated in case of death?

Do you know how is it calculated in case of death?

How is Gratuity calculated in case of death?

What is the death case gratuity calculation?

The calculation of gratuity in case of death in India is calculated based on the Gratuity amount based on the no. of years of service.

• Less than one year – 2 times the basic pay
• One year or more but less than 5 years – 6 times the basic pay
• 5 years or more but less than 11 years – 12 times the basic pay
• 11 years or more but less than 20 years – 20 times the basic pay
• 20 years or more – half the salary for every completed 6 monthly periods subject to a maximum of 33 times of salary.

Death gratuity formula varies based on years of service and ensures structured compensation to nominees.

When is gratuity not paid?

Are there cases in which gratuity will not be paid? Yes, see for what reasons.

• If you are fired for lawlessness or any other act of violence.
• If you include in an offense involving moral turpitude because of which you are fired.

Gratuity forfeiture rules apply in cases of misconduct, fraud, or damage to employer property.

What are the gratuity payment rules?

It can also be called the procedure for applying for gratuity:

• Once you become eligible to receive gratuity, you can apply within 30 days from the date it becomes payable. If the date of retirement is known, even then you can apply before 30 days.
• No claim can be invalid because you have not applied within the period.
• An employer has to specify the amount, with the date of payment, within 15 days of receipt of the application.
• The payment has to be made within 30 days from the date of receipt of the application.
• In case the employer rejects the application, he has to specify the reason.
• The payment can be made in cash, demand draft or cheque.
• If the claim is made to the legal heir or nominee, the employer may ask for a witness or evidence to ensure the genuineness of the claimant.
• You or the legal nominee can complain to the controlling authority (Assistant Labour Commissioner) in case of a dispute due to refusal of an application, underpayment or failure to make the payment within the period.
• The gratuity is still payable even if the employer goes bankrupt, and no court order can put a stay on it.

Latest gratuity rules 2025 and labour law updates may impact timelines, eligibility, and calculation methods.

New Gratuity Rules 2026 – Latest Updates Under Labour Codes

With the implementation of the new labour codes effective from November 21, 2025, several important changes have been introduced that directly impact gratuity calculation, eligibility, and employee benefits in 2026.

• 50% Wage Rule Impact on Gratuity
  Under the new rules, basic salary must constitute at least 50% of total CTC, which increases the base used for gratuity calculation and can lead to a higher pay-out.
• Gratuity Eligibility Reduced to 1 Year (For Fixed-Term Employees)
  Fixed-term and contract employees are now eligible for gratuity after just 1 year of service, instead of the earlier 5-year requirement (still applicable for permanent employees).
• Expanded Coverage for Workforce
  The new rules extend gratuity benefits to contract workers, gig workers, and fixed-term employees, improving social security coverage.
• Higher Long-Term Benefits but Lower Take-Home Salary
  Due to the 50% wage restructuring, contributions toward gratuity and PF increase, which may reduce in-hand salary but improve long-term savings.
• No Change in Basic Formula
  The standard gratuity formula (Last drawn salary × 15 × years of service) / 26 remains unchanged, but the inputs (salary structure & eligibility) have evolved.

What forms are to be used in Gratuity?

This is the list of forms that are to be used in Gratuity:

1. Form I- Application for the payment of Gratuity
2. Form J- Application for the payment of Gratuity by Nominee
3. Form K- Application for the payment of Gratuity by Legal Heirs.
4. Form F- Nomination Form (To make a nomination)
5. Form G- To make a fresh nomination
6. Form H- Modification of the nominee
7. Form L- Issued by the employer to the employee stating the amount and date of payment.
8. Form M –Issued by the employer stating the reason for the rejection of gratuity
9. Form N- Application made to the labour commission by an employee
10. Form O- Issued by the authority to appear for case hearing
11. Form P- Summons issued by the authority to be present for the hearing
12. Form R- Issued by the authority directing to make gratuity payments

Understanding gratuity forms and documentation process helps in faster claim settlement and compliance.

Employers have a right to forfeit gratuity

Did you know that your employer has a right to forfeit your gratuity?

There are two terms on which your employer can forfeit your gratuity. They are listed as follows:

If your services have been terminated for wilful omission or negligence causing loss or damage to or destruction of property of the employer, then your gratuity shall be forfeited to the extent of loss or damage.

The gratuity can be wholly or partially forfeited:

• If you are terminated for your disorderly conduct or violence or;
• If you are terminated for an offence involving moral turpitude, in case it is committed during employment.

Gratuity deduction rules and forfeiture conditions are important to understand before exiting an organization.

Gratuity FAQ:

1. What is the gratuity contribution by the employer?

An employee will get a gratuity from their employer as compensation for the services they have provided to the company. Under the payment of Gratuity Act, it’s mentioned as 4.81% of the basic pay.

2. What if I resign my job just before a few months before completing 5 years? Am I eligible for gratuity?

No. You need to complete 5 years of continuous service to be eligible for gratuity.

3. What if I am contract employee?

If you are a contract employee and completed the 5 years of continuous service, then your contractor will pay you the gratuity.

4. Are part-time employees eligible for gratuity in India?

No. Only fulltime employees are eligible for gratuity.

5. How much time will it take to release the gratuity amount?

The employer must pay the gratuity payment within 30 days of the application being received.

Common questions around gratuity calculation in CTC, gratuity percentage of basic salary, and gratuity eligibility years are frequently asked by employees.

Conclusion

Gratuity is not just a statutory benefit but a crucial part of long-term financial security and retirement planning strategy.

I hope you got a thorough knowledge of gratuity calculation. and understood that gratuity in itself is a benefit.

You would now be knowing the eligibility, calculations, exemptions, forms used and the conditions on which the employer forfeits gratuity.

Using a gratuity calculator or understanding gratuity calculation formula can help you estimate your future benefits accurately.

You can now apply these rules and find how much gratuity you are eligible for and also find what amount you are exempt from tax.

It is in your hands to make a wise decision of investing this gratuity amount for your financial future.

If you have any comments or questions, write them in the comment box below.

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