How To Calculate Gratuity Amount in 2025 – Step-by-Step Guide

Imagine Neha, who joined a private firm in 2014 with a basic salary of ₹50,000 and retired in 2024 after 10 years of service. She was thrilled to learn about her gratuity—Isn’t it interesting how a simple formula turns loyalty into a neat sum?

• Last Drawn Salary: ₹50,000
• Years of Service: 10
• Calculation: (₹50,000 × 15 ÷ 26) × 10 = (₹28,846 × 10) = ₹2,88,462

This one-time payment, which is tax-free up to ₹30,00,000, serves as a significant “thank you” for your years of dedicated work. Isn’t it cool that every year adds half a month’s salary to your total amount? Whether you’re retiring or changing jobs, gratuity is a sweet reward for staying loyal to your company!

What Is the Gratuity Amount? 

Imagine Ramesh, who joined an IT company in 2004 as a software developer with a basic salary of ₹40,000. After 20 years of loyal service, he retired in 2024. As per the Payment of Gratuity Act, 1972, he is eligible for a gratuity payment.

The gratuity formula is:

Gratuity = (15 × Last drawn basic salary × Years of service) ÷ 26
 = (15 × 40,000 × 20) ÷ 26 = ₹4,61,538

This amount is paid tax-free (up to a ₹30 lakh limit) and serves as a reward for his long-term contributions.

Key Points:

• Minimum 5 years of service is needed.
• Calculated on basic salary and years of service.
• Maximum gratuity limit: ₹20,00,000 (tax-free up to ₹30,00,000).
• Paid on retirement, resignation, death, or disability.
• Governed by the Payment of Gratuity Act, 1972.
  
  

Gratuity Table Example

Who Is Eligible for Gratuity? 

Let’s say Priya joined a textile factory in Surat in 2018 with a basic salary of ₹30,000. She worked there for 6 years and left the job in 2024 to start her own business. Since she worked for more than 5 years, she got gratuity.

Raj also worked at the same place but sadly died in a road accident after 2 years. Even though he didn’t complete 5 years, his family still got gratuity because the rule is relaxed in case of death or disability.

Key Eligibility Points:

• Minimum 5 years of continuous service is required.
• Applies to firms with 10+ employees.
• Paid upon retirement, resignation, death, or disability.
• 5-year rule waived in case of death/disability.
• Private firms may offer gratuity voluntarily.
  
  

Eligibility Table

Gratuity Calculation Formula:

Gratuity = (Last Drawn Salary × 15 / 26) × Years of Service

Let’s understand this with a simple example.

Amit worked at a company for 12 years and decided to retire. His last drawn basic salary plus dearness allowance was ₹40,000. To calculate his gratuity:

Gratuity = (₹40,000 × 15 / 26) × 12
 = ₹23,077 × 12
 = ₹2,76,924

So, Amit received ₹2,76,924 as a thank-you gift for his long service. The 15/26 part means he gets half a month's salary for each year. This formula ensures loyal employees are rewarded fairly at the end of their journey.

Gratuity Calculation for Government vs. Private Sector

Let’s say Ravi and Anil are close friends. Ravi worked as a government school teacher, while Anil worked in a private IT company. Both retired after 8 years of service, with a last drawn salary of ₹40,000.

They used the same formula:

Gratuity = (₹40,000 × 15 / 26) × 8 = ₹1,84,615

Both received ₹1,84,615 as gratuity. However, there was a key difference.

Ravi, a government employee, didn’t pay any tax on it — it was entirely tax-free.
Anil (a private employee) was taxed, but only on the amount exceeding ₹20,00,000, if applicable.

Key Points:

• The formula is the same: (Salary × 15/26) × Years
• Government employees: Gratuity is entirely tax-free
• Private employees: Tax exemption up to ₹20,00,000
  
  

Gratuity Comparison Table

Online Gratuity Calculators: Are They Reliable?

For Example, Meena worked at a company for 10 years, and her last drawn basic salary plus dearness allowance was ₹45,000. She used an online gratuity calculator from Policybazaar. After entering:

• Salary: ₹45,000
• Years of Service: 10
  
  

The calculator gave her:
 

Gratuity = (₹45,000 × 15 / 26) × 10 = ₹2,59,615

This saved her time and gave an accurate estimate. She cross-checked the formula against the manual and found it correct.

How to Use a Gratuity Calculator Effectively?

Tax Implications on Gratuity

The information below is taken from an Economic Times article.

Let’s say Mr Verma, a senior central government employee, retired on February 1, 2024, after 30 years of service. His last drawn basic salary was ₹80,000, and he also received a Dearness Allowance (DA) of 50%, thanks to the recent hike.

Let’s calculate his gratuity:
 

Gratuity = (₹80,000 × 15 / 26) × 30 = ₹13,84,615

Earlier, the maximum gratuity limit was ₹20 lakh, but starting January 1, 2024, it has been increased to ₹25 lakh. So, Mr Verma would get the full ₹13.84 lakh without any tax deduction — and if his calculation had gone up to ₹25 lakh, even that would be fully tax-free under the new rule.

Key Highlights:

• Gratuity is a lump sum payment made at retirement or upon death.
• The central government gratuity ceiling has been raised from ₹20,00,000 to ₹25,00,000.
• The DA increase to 50% triggered this change.
• Effective from January 1, 2024.
• Announced via circular on May 30, 2024.
  
  

Facts & Figures Table

Gratuity in Case of Resignation, Retirement, or Death

Here's a table summarising Gratuity Eligibility in Different Scenarios:

Conclusion

Gratuity is a special thank-you payment from your employer for your years of service. You get it when you retire, leave after 5 years, or if you die or become disabled. It’s calculated based on your last salary and the length of your employment. Government workers receive a full tax-free gratuity, while private workers are eligible for tax benefits of up to ₹20 lakh. The government limit has recently increased to ₹25 lakh. Knowing about gratuity helps you easily receive the money you deserve.

FAQs

Q1: What is gratuity, and when do I receive it?
Gratuity is a lump-sum payment given by your employer when you retire, resign after 5 years, or in case of death or disability.

Q2: How is gratuity calculated?
Gratuity = (Last drawn salary × 15 ÷ 26) × Years of service.

Q3: Who is eligible for gratuity?
Employees working at firms with 10+ employees, with at least 5 years of continuous service (except in death or disability cases).

Q4: Is gratuity taxable?
Government employees receive an entirely tax-free gratuity, while private employees are eligible for a tax exemption of up to ₹20,00,000.

Q5: Has the gratuity limit changed recently?
Yes, for central government employees, the tax-free gratuity limit has increased from ₹20,00,000 to ₹25,00,000, effective January 1, 2024.

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