Gratuity is a lump sum an employer pays when a job ends, if the law or the contract says so. It is not a monthly allowance, and it is not the provident fund. The provident fund is 12% of wages, set aside while you work. Gratuity is settled at the end.
For someone covered by the payment-of-gratuity law, the sum is 15 days’ wages for every completed year, or for a part of a year that is more than six months. A month for this sum is 26 working days, so the factor is 15/26. Exactly six extra months do not round up. The five-year test uses completed years, with no rounding. Death, disablement, and the end of a fixed-term contract of at least one year do not need five years.
The four labour codes have been in force from 21 November 2025. Gratuity on an exit on or after that date uses last-drawn wages for the whole service. Wages are basic pay, dearness allowance and retaining allowance. If the allowances that go into the half-pay check are more than half of remuneration, the excess is added back. The calculator can do that check. The example below leaves it at zero.
Tax sits in section 19 of the Income-tax Act, 2025, which was section 10(10). A government employee’s death-cum-retirement gratuity is excluded in full. Gratuity under the Payment of Gratuity Act is excluded up to the ceiling. Any other gratuity is the least of the amount received, the notified limit, and half a month’s salary for each completed year. The department’s threshold page still shows ₹20,00,000. That ceiling was notified by S.O. 1420(E) dated 29 March 2018. This site does not use a higher figure.
A worked example
Covered employee, resignation, basic pay plus dearness allowance of ₹26,000 a month, 10 completed years, no extra months, no allowance add-back. The gratuity engine’s payable amount is ₹1,50,000. The tax-free part is ₹1,50,000, because ₹1,50,000 is under ₹20,00,000. Nothing in this example is added to taxable salary.
Change the years, or push the wage high enough that 15/26 times years crosses ₹20,00,000, and the tax-free line stays at ₹20,00,000 unless you are in the government death-cum-retirement case, which this calculator does not compute with the pension-rules formula. Use the gratuity calculator. Put any taxable slice on the return with the filing guide.
Mistakes people make
- Rounding six months up to a year. The law says “in excess of six months”.
- Using CTC instead of wages. HRA is not automatically wages.
- Assuming five years are required on death or disablement.
- Treating the whole payment as tax-free once it crosses ₹20,00,000.
- Splitting service into a pre-November 2025 piece and a later piece. The ministry’s position for an exit on or after 21 November 2025 is last-drawn wages for the whole service.
The section
The payment formula is section 53 of the Code on Social Security, 2020, which repeats section 4(2) of the Payment of Gratuity Act, 1972. The tax exclusion is section 19, table items 3, 5 and 6 (this was section 10(10)).
Questions
Do I need five years of service?
On resignation or retirement, yes, for a covered employee. Death, disablement, and the end of a fixed-term contract of at least one year do not use that five-year test. The 10-year example is above the line, so it is payable.
How is the amount worked out?
For covered staff it is 15/26 of last-drawn wages times the counted years. Wages of ₹26,000 for 10 years come to ₹1,50,000. A part of a year counts only when the extra service is more than six months.
Is gratuity tax-free?
A government employee’s death-cum-retirement gratuity is excluded in full. For anyone else the tax-free amount stops at ₹20,00,000. The example’s ₹1,50,000 is fully inside that line, so the tax-free figure is ₹1,50,000.
Sources
Figures checked 28 Oct 2026.