Gratuity Calculation Formula: 15/26 Rule Explained with 5 Examples
Understand how Indian employers calculate gratuity. Learn the 15/26 formula, the 240 day court rule, and the 20 lakh tax free limit.
Ankit Bansal• Founder, fincalculator.in
15 August 2026
9 min read
Share:
Loading content...
Frequently Asked Questions (FAQs)
Is gratuity calculated on basic salary or total CTC?
Gratuity is calculated strictly on your last drawn Basic Salary plus Dearness Allowance (DA). Allowances like HRA, special allowance, and performance bonus are not included in the calculation.
Are you eligible for gratuity if you resign after 4 years and 8 months?
Yes. Under Section 2A of the Payment of Gratuity Act and several High Court rulings, completing 4 years plus 240 working days in your 5th year legally satisfies the continuous service condition.
What is the maximum tax free gratuity limit in India?
For private sector employees, gratuity up to ₹20 Lakhs is completely tax free under Section 10(10) of the Income Tax Act. Any amount received above ₹20 Lakhs is added to your income and taxed at your regular slab rates.
What is the 1 year gratuity rule for fixed term contract workers?
Under the Code on Social Security 2020, fixed term contractual employees are entitled to gratuity on a pro rata basis after completing just 1 year of service, rather than the 5 year requirement for permanent staff.
Relevant Financial Calculators
Put these concepts into practice using our free, instant financial calculators:
When you resign from a company after several years of service, one of the largest single sums credited to your account is your gratuity.
Gratuity is a statutory reward governed by the Payment of Gratuity Act 1972. It is paid by employers as gratitude for continuous service.
The calculation formula looks simple on paper, but details like Sunday exclusions, month rounding, and tax caps confuse most employees. Here is the exact math explained in plain English.
1. The 15/26 formula: why 26 days instead of 30?
For companies covered under the Gratuity Act (almost every private company with 10 or more staff), the law uses this formula:
The Statutory Gratuity Formula
Gratuity = (15 × Last Drawn Basic Salary × Completed Years of Service) ÷ 26
Why 26? The law treats a working month as 26 days, excluding 4 weekly off days (Sundays). Dividing your monthly basic by 26 gives your true one-day wage. You get 15 days of wages for every completed year of service.
Quick Tip
Only your Last Drawn Basic Salary + Dearness Allowance (DA) counts. HRA, conveyance, special allowances, and annual bonuses are legally excluded.
2. How partial months get rounded
You rarely resign on your exact employment anniversary. The law uses a fair rounding system:
If you work more than 6 months in your final year, it rounds up to the next full year. For example, 7 years and 7 months is counted as 8 years.
If you work 6 months or less, that fractional year is ignored. For example, 7 years and 4 months is counted as 7 years.
The 4 Year and 240 Day Court Rule
A common question is whether resigning at 4.5 or 4.8 years earns gratuity. Under Section 2A of the Act and landmark High Court judgments, if you complete 4 full years and work at least 240 working days in your 5th year (approx 4 years and 8 months), you are legally entitled to 5 years of gratuity.
3. Five practical examples: from junior to senior
Let us look at five real scenarios to see how tenure and salary affect the final payout:
Gratuity Payout Examples Across Different Tenures
Employee Profile
Last Basic
Tenure
Years Counted
Gratuity Payout
Tax Status
Junior Engineer (Resigning early)
₹35,000
4 yrs 8 mos
5 Years
₹1,00,962
100% Tax Free
Mid Level Manager (7 year tenure)
₹65,000
7 yrs 7 mos
8 Years
₹3,00,000
100% Tax Free
Senior Lead (12 year tenure)
₹1,10,000
12 yrs 2 mos
12 Years
₹7,61,538
100% Tax Free
VP / Director (20 year tenure)
₹2,20,000
19 yrs 9 mos
20 Years
₹25,38,462
₹20L Tax Free, ₹5.38L Taxed
Fixed Term Contract Staff (2 years)
₹40,000
2 yrs 0 mos
2 Years
₹46,154
100% Tax Free (1-Yr Rule)
4. Calculate your exact gratuity payout
Use the interactive calculator below to input your exact monthly basic pay and service duration:
Interactive Gratuity Calculator 2026
Calculate your exact payout, tax-free exemption status, and 5-year eligibility timeline.
