What is Gratuity and How is it Calculated?
Understanding Gratuity
Gratuity is a monetary benefit provided by an employer to an employee in recognition of past services. It is a part of the salary and is paid when an employee leaves the organization after completing a minimum period of continuous service (typically 5 years in India, 1 year in UAE).
Key Points About Gratuity
- India: Governed by the Payment of Gratuity Act, 1972
- UAE: Regulated by Federal Decree-Law No. 33 of 2021
- Calculated based on last drawn salary and years of service
- Tax benefits available in India under Section 10(10)
- Mandatory for organizations meeting certain criteria
Eligibility Criteria
India
- Minimum 5 years of continuous service (exceptions for death/disability)
- Applicable to organizations with 10 or more employees
- Covers factories, mines, oil fields, plantations, ports, railways, shops, and establishments
UAE
- Minimum 1 year of continuous service
- Applicable to all employees under UAE Labour Law
- Different calculations for limited vs unlimited contracts
- Reduced benefits if resignation occurs before 5 years
Gratuity Calculation Formulas
India - Payment of Gratuity Act 1972
For Organizations Covered Under the Act (≥10 employees)
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26
Where:
- Last Drawn Salary = Basic Salary + Dearness Allowance
- Years of Service = Completed years (6+ months count as 1 year)
- 26 = Average working days per month (excluding Sundays)
For Organizations Not Covered (< 10 employees)
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30
Example Calculation (India)
Scenario: Employee with ₹50,000 basic salary + DA, 10 years service, covered under Act
Gratuity = (₹50,000 × 15 × 10) ÷ 26 = ₹2,88,461.54
UAE - End of Service Calculation
Unlimited Contract
| Service Period |
Gratuity Rate |
| First 5 years |
21 days' salary per year |
| After 5 years |
30 days' salary per year |
Daily Wage Calculation: Monthly Salary ÷ 30 days
Maximum Cap: Total gratuity cannot exceed 2 years' salary
Example Calculation (UAE)
Scenario: Employee with AED 10,000 basic salary, 8 years service, unlimited contract
- Daily wage = AED 10,000 ÷ 30 = AED 333.33
- First 5 years = AED 333.33 × 21 × 5 = AED 35,000
- Next 3 years = AED 333.33 × 30 × 3 = AED 30,000
- Total = AED 65,000
Important UAE Notes
- If resignation before 5 years: Gratuity is reduced by ~33% for first year, ~67% for 1-3 years, ~100% after 3-5 years
- Limited contracts: Different forfeiture rules apply
- No gratuity if employee is terminated for misconduct
- Gratuity is tax-free in UAE
Tax Treatment of Gratuity in India
Section 10(10) - Tax Exemption
Under Income Tax Act, gratuity received by an employee is exempt from tax subject to certain limits. The exemption is the least of the following:
- ₹20,00,000 (Twenty Lakhs) - Maximum exempt limit
- Actual gratuity received
- Eligible gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
Tax Exemption Categories
Government Employees
Entire gratuity amount is exempt from tax without any limit.
Private Sector Employees (Covered under Act)
Exempt up to ₹20 lakhs or eligible amount, whichever is less.
Private Sector Employees (Not Covered)
Exempt up to ₹20 lakhs or half month's average salary for each year of service, whichever is less.
Example of Tax Calculation
Case: Employee receives ₹25,00,000 gratuity. Eligible amount (formula) = ₹22,00,000
Exempt amount: Least of ₹25L, ₹22L, ₹20L = ₹20,00,000
Taxable amount: ₹25,00,000 - ₹20,00,000 = ₹5,00,000
Frequently Asked Questions (FAQ)
What is the minimum service period required for gratuity?
India: 5 years of continuous service is required. However, this condition is waived in case of death or disability of the employee.
UAE: 1 year of continuous service is the minimum requirement for end-of-service benefits.
Is gratuity taxable in India?
Gratuity is partially tax-exempt in India under Section 10(10) of the Income Tax Act. For government employees, the entire amount is exempt. For private sector employees, exemption is available up to ₹20 lakhs, subject to certain calculations. Any amount above the exempt limit is taxable as per applicable income tax slabs.
What if I resign before 5 years in India?
Under the Payment of Gratuity Act 1972, you are not entitled to gratuity if you resign before completing 5 years of service. However, some organizations may have their own gratuity schemes that allow payment even before 5 years, though this is not mandatory under the law.
How is gratuity calculated in UAE for limited contracts?
For limited contracts in UAE, the calculation is the same as unlimited contracts (21 days for first 5 years, 30 days thereafter). However, if the contract ends naturally at its expiry date, full gratuity is paid. If the employee resigns before the contract end date, the gratuity amount may be reduced based on years of service, similar to unlimited contracts.
Can employer refuse to pay gratuity?
India: No, if you meet the eligibility criteria (5 years service, organization covered under Act), the employer is legally bound to pay gratuity. Refusal can be challenged in labor court.
UAE: End-of-service gratuity is a statutory right. However, it may be forfeited if the employee is terminated for serious misconduct as defined under UAE Labour Law.
What components of salary are included in gratuity calculation?
India: Only Basic Salary and Dearness Allowance (DA) are included. Other allowances like HRA, Conveyance, Medical, etc., are NOT included.
UAE: Only the basic salary is used for calculation. Housing allowances, transport allowances, and other benefits are excluded.
When should gratuity be paid after leaving the job?
India: Gratuity must be paid within 30 days from the date it becomes payable (i.e., from the date of resignation/retirement/termination).
UAE: End-of-service gratuity should be paid within 14 days of the end of employment contract.
Is there a maximum limit on gratuity amount?
India: There is no maximum limit on the gratuity amount that can be paid. However, the tax exemption is capped at ₹20 lakhs for private sector employees.
UAE: Yes, the total end-of-service gratuity cannot exceed 2 years' basic salary, regardless of how many years the employee has worked.
What happens to gratuity if the employee dies?
India: In case of death, gratuity is payable to the nominee or legal heirs even if the employee has not completed 5 years of service. The entire amount is tax-exempt for the nominee.
UAE: Full gratuity is paid to the legal heirs regardless of the length of service.
Can gratuity be forfeited or reduced?
India: Gratuity can be forfeited wholly or partially if the employee's service has been terminated for riotous or disorderly conduct, or any act of violence, or for an offense involving moral turpitude.
UAE: Gratuity may be reduced if the employee resigns within the first 5 years. It can be completely forfeited only if the employee is terminated for serious misconduct.
When to Use the Gratuity Calculator
Planning Your Resignation
Before submitting your resignation, use this calculator to estimate your gratuity amount. This helps you negotiate your exit package and plan your finances during the notice period.
Retirement Planning
If you're approaching retirement, calculate your expected gratuity to include it in your retirement corpus planning. This lump sum can be a significant addition to your retirement fund.
Job Change Decisions
When considering a job change, factor in the gratuity you'll receive from your current employer versus waiting longer to accumulate more. This is especially important in UAE where benefits increase after 5 years.
Tax Planning
For Indian employees, understanding the taxable portion of your gratuity helps in advance tax planning. You can plan investments in tax-saving instruments to offset the taxable gratuity amount.
Expat Planning (UAE)
Expats working in UAE should regularly calculate their end-of-service benefits to understand their exit fund. This is particularly important as there's no provident fund or pension in UAE for private sector employees.
Legal References and Sources
India - Official References
- Payment of Gratuity Act, 1972 (as amended in 2018)
- Payment of Gratuity (Amendment) Act, 2018 - Increased limit to ₹20 lakhs
- Income Tax Act, 1961 - Section 10(10) for tax exemption
- CBDT Circular No. 7/2019 - Clarification on ₹20 lakh limit
UAE - Official References
Helpful Resources
Related CalcArena Calculators
Disclaimer
This calculator provides estimates based on standard formulas under the Payment of Gratuity Act 1972 (India) and UAE Labour Law. Actual gratuity amounts may vary based on specific organizational policies, employment contracts, and recent amendments to laws. For precise calculations and legal advice, please consult with HR professionals or legal experts. CalcArena is not responsible for any discrepancies between calculated and actual amounts.