Government, Private (Act-covered) & Non-Act employees — with tax exemption and growth projection
If you continue working with annual salary increments:
How your gratuity grows with service years (at current salary):
| Service Years | Gratuity Amount | Tax-Exempt | Taxable |
|---|
The Payment of Gratuity Act applies to factories, mines, plantations, ports, railways, and establishments employing 10 or more persons. Once covered, an establishment remains covered even if headcount drops below 10. Employees become eligible after completing 5 continuous years of service, though the Supreme Court has held that 4 years and 240 days also qualifies. The act was designed as a retirement and separation benefit to reward long-term service.
Private sector (Act-covered): Gratuity = (Last drawn basic + DA) × 15 × Years of service ÷ 26. The divisor of 26 represents working days in a month. This is the most common formula and applies to the vast majority of private sector employees in India.
Private sector (Non-Act): Gratuity = (Last drawn basic + DA) × 15 × Years of service ÷ 30. The divisor is 30 (calendar days) instead of 26. This applies to employees in establishments not covered under the Act, which is rare for formal sector employment.
Government employees: Central government employees receive Death-cum-Retirement Gratuity (DCRG) under CCS (Pension) Rules. The formula is (Last basic + DA) × qualifying half-year periods ÷ 4, subject to a maximum of 66 half-year periods (33 years) and a ceiling of ₹25 lakh (revised from ₹20 lakh in January 2024 when DA crossed 50%).
Under the Gratuity Act, if you have worked for more than 6 months in the final year, it rounds up to one full year. For instance, 7 years and 8 months counts as 8 years, but 7 years and 4 months counts as 7 years. This rounding rule can meaningfully impact your payout, so it is worth considering timing if you are close to the 6-month threshold.
Government employees: Gratuity is fully exempt from income tax under Section 10(10)(i), regardless of the amount received. There is no upper limit on the exemption.
Private sector (Act-covered): Gratuity is exempt up to ₹20 lakh under Section 10(10)(ii). The exempt amount is the least of: (a) actual gratuity received, (b) 15 days' salary for each completed year (using 26-day month), or (c) ₹20 lakh. Any excess is taxable at your slab rate.
Private sector (Non-Act): Exempt up to ₹20 lakh under Section 10(10)(iii). The exempt amount is the least of: (a) actual gratuity, (b) half month's salary for each completed year, or (c) ₹20 lakh.
The ₹20 lakh limit applies to the aggregate of all gratuity payments received across your entire lifetime from all employers.
An employer can forfeit gratuity only if the employee is terminated for misconduct causing physical damage to employer property, or for moral turpitude forming part of a criminal offence. Resignation, retirement, or poor performance are not valid grounds for forfeiture. If your employer refuses to pay without legal grounds, you can file a complaint with the Controlling Authority under the Act.
The Code on Social Security, 2020 (when fully notified) will expand gratuity coverage to gig workers and platform workers. It also proposes reducing the eligibility threshold from 5 years to 1 year for fixed-term contract employees. The calculation formula remains the same, but the broader coverage means more workers will qualify.
For Act-covered employees: (15 × Last Drawn Salary × Years) / 26. For non-Act employees, the divisor is 30. Government employees use (Salary × Half-Year Periods) / 4 under CCS Pension Rules. If additional months exceed 6, service years round up by 1.
Government gratuity is fully tax-exempt. For private sector employees (Act and non-Act), gratuity is exempt up to ₹20 lakh under Section 10(10). Any amount above this is added to taxable income at your slab rate.
Generally 5 years of continuous service. However, gratuity is payable regardless of tenure for death or disability. The Supreme Court has clarified that 4 years and 240 days also qualifies in many cases.
Central government employees: ₹25 lakh ceiling (revised January 2024). Private sector: no statutory cap on amount, but tax exemption is limited to ₹20 lakh. Employers can pay more as ex-gratia.
Government DCRG uses (Basic+DA) × half-year periods / 4 (max 66 half-years = 33 years), capped at ₹25 lakh, and is fully tax-exempt. Private sector uses the 15/26 formula with no amount cap but only ₹20 lakh tax-exempt.