What gratuity actually is
Gratuity is a lump sum your employer owes you for staying — a statutory thank-you, not a bonus at their discretion. The Payment of Gratuity Act, 1972 makes it a legal right for anyone completing five years of continuous service with an employer of 10 or more people.
It is one of the few employee benefits in India that is genuinely mandatory. If you qualify and the company does not pay within 30 days, it owes you interest on top.
The formula, and the number nobody expects
For an employer covered by the Act:
Gratuity = (15 × last drawn Basic + DA × years of service) ÷ 26
The 26 is the Act's definition of a working month. Employers outside the Act divide by 30 instead, which pays about 13% less for identical service.
The mistake almost everyone makes is using gross salary. The law says Basic + Dearness Allowance only. On a typical Indian salary structure, where Basic is 40–50% of gross, using gross roughly doubles the answer. If your ₹1.5 lakh monthly gross has a ₹60,000 Basic, gratuity is computed on ₹60,000.
The five-year cliff is brutally literal
Four years and eleven months earns you nothing. There is no pro-rata payment, no partial entitlement. Some courts have accepted 4 years 240 days as qualifying in the fifth year, but this is contested and not something to plan a resignation around.
The exceptions are death and disablement, where gratuity is payable regardless of tenure.
The rounding rule, in one line
Beyond five years, a part-year of more than six months counts as a full year. 7 years 7 months is paid as 8. 7 years 5 months is paid as 7. It is worth knowing what your resignation date does to that boundary — a few weeks can be worth a full year of gratuity.
Tax: the ₹20 lakh ceiling is a career limit
Exempt up to the least of: what you actually received, what the formula gives, and ₹20 lakh.
That ₹20 lakh is a lifetime cap across every employer you will ever have — not per job. Use ₹18 lakh of it at 45 and only ₹2 lakh of exemption remains for the rest of your career. Government employees are exempt without limit.