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Gratuity Formula Explained — Step-by-Step Math + Worked Examples

Gratuity inputs

The formula, decoded

Act-covered gratuity = (15 / 26) × last drawn (basic + DA) × years of service

Three numbers do the work:

  • 15 = half-month’s wages per completed year (statutory minimum)
  • 26 = working days in a month (calendar 30 minus 4 Sundays)
  • years = rounded per Section 4(2): partial year > 6 months counts as full

For ₹50,000 basic+DA and 10 years of service:

  • Daily wage = ₹50,000 / 26 ≈ ₹1,923
  • 15 days’ wages ≈ ₹28,846
  • × 10 years = ₹2,88,461 gratuity

Why 15/26 instead of 15/30?

The Act treats Sundays as paid leave, not working days. So a month is 26 working days (30 − 4 Sundays), and the daily wage divides by 26 rather than 30. This produces a ~13% higher daily rate than a calendar-day calculation.

Non-Act employees (rare, in orgs with fewer than 10 employees) use 15/30 — the calendar-day formula. So the same ₹50K × 10yr earns ₹2,50,000 under non-Act, vs ₹2,88,461 under the Act.

The ₹20 lakh tax-free cap

Income Tax Act §10(10)(ii) caps the tax-free portion at the lower of:

  1. Actual gratuity received
  2. Formula amount per the Act
  3. ₹20,00,000 (lifetime cap per career)

So if you earn ₹2L basic and serve 30 years:

  • Formula amount = (15/26) × 2,00,000 × 30 = ₹34,61,538
  • Tax-free portion = min(34.6L, ₹20L) = ₹20L
  • Taxable portion = ₹14,61,538 (added to salary, taxed at slab rate)

Use our Income Tax Calculator to compute the slab tax on the taxable portion.

Worked examples

SalaryYearsCoverageFormula amountTax-freeTaxable
₹50K10Act₹2,88,461₹2,88,4610
₹2L30Act₹34,61,538₹20,00,000₹14,61,538
₹50K10Non-Act₹2,50,000₹2,50,0000

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Frequently Asked Questions

Why is the divisor 26 and not 30?
The Payment of Gratuity Act 1972 treats a month as 26 working days, subtracting Sundays from a typical 30-day month. So 15 days' wages divided by 26 days gives the daily rate × 15. For non-Act-covered employees (rare, in orgs with fewer than 10 employees), the divisor is 30 (calendar days), reducing the gratuity slightly.
Why 15 days specifically?
15 days represents half-month's pay per completed year of service — the statutory minimum benefit set by Parliament when the Act was enacted in 1972. This is the floor; employers may pay more (called ex-gratia gratuity), but never less.
How does the partial-year rounding work?
Per Section 4(2) of the Act, any portion of a year exceeding 6 months counts as a full year. So 10 years 7 months = 11 years; 10 years 5 months = 10 years; exactly 10 years 6 months = 10 years (must exceed 6 months to round up).
Where does the ₹20 lakh cap come from?
Income Tax Act §10(10)(ii) — Finance Act 2018 raised the cap from ₹10L to ₹20L unifying it for all private employees regardless of whether they're Act-covered. The cap is lifetime per career, not per employer.
How does the Act-covered formula differ from non-Act?
Act-covered (most private employees): (15/26) × salary × years. Non-Act (orgs with fewer than 10 employees): (15/30) × salary × years. The difference is ~13% lower gratuity for non-Act employees because of the larger divisor.
Are govt employees treated differently?
Govt employees fall under CCS Pension Rules with the same (15/26) formula but get full tax exemption under a separate clause (no ₹20L cap). Use the calculator with coverage type 'Govt' to see this.
Compliance disclaimer

The calculations on this page are illustrative based on current EPFO/PFRDA rules. Actual maturity values depend on contribution patterns, scheme rules in effect at maturity, and future rate changes. Educational content only — verify with EPFO/NSDL before financial decisions.

About this calculator

Reviewed by Jayesh Jain, AMFI Registered Mutual Fund Distributor (ARN-286359 — verify ).

Last reviewed: 2026-05-09

Formula source: Payment of Gratuity Act 1972 §4; IT Act §10(10)

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