Gratuity: The 5-Year Rule and What You Actually Get
It is in your CTC, but you only see it if you stay.
What gratuity is and how it is calculated
Gratuity is a statutory lump sum an employer pays you for continuous service, under the Payment of Gratuity Act. The standard formula is fifteen days of your last drawn basic pay for each completed year of service: last basic multiplied by 15, divided by 26, multiplied by the number of years. In a CTC breakup it usually appears as a provision of about 4.81% of basic per year, which is the same fifteen-days-a-year figure expressed annually.
The five-year rule
The catch is eligibility. You are generally entitled to gratuity only after five years of continuous service with the same employer. Leave before completing five years and you usually walk away with nothing on that line, even though it was counted in your CTC and shown as part of your package every year. There are narrow exceptions, such as death or disablement, but for a normal resignation the five-year threshold is the rule.
The tax on it
When you do receive gratuity, it is tax-exempt up to a lifetime limit of ₹20 lakh for private-sector employees covered by the Act, with the exempt amount also capped by the formula and your actual receipt. Anything above the exempt limit is taxed as salary. For most people leaving after a normal tenure, the whole gratuity falls within the exemption and arrives tax-free.
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Decode your offer letter →Frequently asked questions
- Do I get gratuity if I leave before five years?
- In most cases, no. Entitlement generally requires five years of continuous service with the same employer, so a normal resignation before that means you forfeit the gratuity, even though it was part of your CTC. Death and disablement are the main exceptions.
- How is gratuity calculated in India?
- For employees covered by the Payment of Gratuity Act, it is fifteen days of last drawn basic pay for each completed year: last basic times 15, divided by 26, times years of service. In a CTC it is provisioned at about 4.81% of basic per year.
- Is gratuity taxable?
- It is tax-exempt up to ₹20 lakh over your lifetime for private employees covered by the Act, subject to the formula limit. Amounts above that are taxed as salary. For a typical tenure, gratuity usually arrives fully tax-free.
Last reviewed August 2026.