How Do Gratuity Calculation, Limits and Tax Differ for Government and Private Employees?
Disclaimer: This article is for general information/education and is not investment advice. The information is shared in good faith and for general informational purposes only. Ujjivan SFB does not make any representations or warranties regarding the accuracy, completeness, or reliability of the content.
September 15, 2026
Gratuity is a lump-sum payment an employer pays you when your employment with the concerned organisation ends and you meet the gratuity eligibility terms and conditions. Please note that gratuity is not paid every month along with your salary or accumulated like your Employees' Provident Fund (EPF). It is a separate employee benefit, different from EPF, pension, or Employees' State Insurance (ESI). It is a legal benefit governed by the Code on Social Security, 2020, and not a voluntary payment that an employer can choose to offer or withhold.
This blog walks you through how gratuity differs for government and private employees, including the gratuity eligibility rules, calculation, payment and tax treatment.
When is an Organisation Liable to Pay Gratuity?
If an organisation is covered under the applicable establishments under the Code on Social Security, 2020, and has 10 or more employees, it is liable to pay gratuity to eligible employees. Once an organisation becomes liable to pay gratuity, it continues to be liable even if its employee count later falls below 10. This 10-employee threshold generally applies to non-government organisations.
How Does Gratuity Work?
From joining an organisation to gratuity being credited to your account, the flow can be:
Join an eligible organisation → Complete the required period of service → Become eligible for gratuity → Receive the gratuity amount when your employment ends
This basic process remains the same for both government and private employees. The required period of service depends on the type of employment and the reason for the end of employment.
Does Gratuity Eligibility Differ for Government and Private Employees?
The basic eligibility conditions for gratuity are broadly the same for both government or private employees.
The eligibility requirements for gratuity include:
1. 5 years of continuous service
If you are a regular or permanent employee, you generally need to complete five years of continuous service with the same employer to become eligible for gratuity. Under Section 2A of the Payment of Gratuity Act, if you complete 4 years and 240 days (for a 6-day workweek) or 4 years and 190 days (for a 5-day workweek) in your fifth year, it is counted as a full year of continuous service, making you eligible for gratuity at approximately 4 years and 8 months.
2. 1 year of service
As per latest rules, if you are a fixed-term employee directly hired by the employer, you can become eligible for gratuity after completing one year of service from the start of the contract.
The rule is different if you work through a contractor. In such cases, the contractor is treated as the employer for gratuity purposes, and the applicable eligibility rules are based on your employment with the contractor.
3. Death or disablement
If an employee dies or suffers disablement due to an accident or disease during employment, the five-year service requirement does not apply. Gratuity becomes payable without a minimum service period.
Will Your Gratuity Eligibility Period Continue If You Move to Another Government Department?
If you move from one government department to another through the prescribed process, your previous government service continues to count for gratuity.
Situations where your gratuity can continue after the change in department include:
- If you leave your existing government post through a technical resignation, your service in the previous department will be counted along with your service in the new department for gratuity purposes.
- If you are officially transferred or deputed to another government department, your previous service may continue to count.
If you leave your government post through an ordinary resignation without following the prescribed process, your previous service may not be carried forward for gratuity purposes.
Will Private Employees' Gratuity Eligibility Period Continue If They Move to Another Company?
If you switch from one company to another, your service period with the previous employer generally does not carry forward for gratuity eligibility. Your service with the new employer is counted separately.
For example, if you worked for 4 years with Company A and then joined Company B, those four years generally won't be added to your service with Company B to meet the gratuity eligibility period.
Do Leaves or a 5-Day Workweek Extend the Gratuity Eligibility Period?
Not every absence or reduced number of working days extends your gratuity eligibility period. If you take eligible leave, or are away from work due to sickness, an accident, or other permitted circumstances, these periods still count as continuous service, subject to the conditions under the law.
A 5-day workweek also does not extend the five-year service period. Your weekly days off are part of your employment and do not add to the service period required for gratuity eligibility.
Which Salary Components Are Considered for Gratuity for Government and Private Employees?
The salary components considered for gratuity are mostly the same for government and private employees, with the 50% rule applying to non-government employees.
For gratuity calculation, generally, Basic Pay and Dearness Allowance (DA) are considered in full, based on the amount you receive. In some cases, Retaining Allowance (RA) or applicable commission can also be considered.
For non-government employees, if your Basic Pay + DA make up less than 50% of your total remuneration, the 50% rule determines whether any additional amount from the relevant allowances needs to be included in your wages.
- If the relevant allowances are within the 50% limit, there is no excess amount to add to your wages.
- If the relevant allowances exceed the 50% limit, the amount above the 50% limit is added to your wages along with your Basic Pay and DA.
The other components considered under this rule may include:
The table below shows how the 50% rule affects the wages considered for gratuity calculation.
| Example 1: Allowances within 50% | Example 2: Allowances above 50% | |
|---|---|---|
| Basic Pay + DA + RA | ₹30,000 | ₹30,000 |
| Total remuneration | ₹60,000 | ₹60,000 |
| 50% of total remuneration | ₹30,000 | ₹30,000 |
| Relevant allowances | ₹25,000 | ₹35,000 |
| Excess above 50% | Nil | ₹5,000 |
| Wages considered for gratuity | ₹30,000 | ₹35,000 |
In Example 1, the allowances are within the 50% limit, so there is no excess to add.
In Example 2, ₹5,000 is above the 50% limit, so it is added to Basic Pay + DA + RA to arrive at the wages considered for gratuity.
How is Gratuity Calculated for Government and Private Employees?
Gratuity calculation is governed by different rules for government and private employees. The rules for private employees are applied as per the Code on Social Security, 2020, while government employees are covered under the Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021.
To calculate the gratuity amount, your eligible salary components and qualifying service are required.
- For private employees, the formula to calculate gratuity is:
Gratuity = (Eligible components of last-drawn salary ÷ 26) × 15 × Number of years of service
- For government employees, the formula to calculate gratuity is:
Gratuity = (Eligible components of last-drawn salary ÷ 4) × Number of completed six-month periods of qualifying service
Where:
For private employees, if you have worked for more than six months in the final year, it is counted as one additional year. For example, 7 years and 7 months will be considered as 8 years, while 7 years and 6 months will be considered as 7 years.
The table below shows the difference in gratuity amount when you work for one extra month and cross the six-month mark in the final year.
| Scenario | Last-Drawn Wages | Actual Service | Service Counted | Gratuity |
|---|---|---|---|---|
| Example 1 | ₹1,00,000/month | 7 years 6 months | 7 years | ₹4,03,846 |
| Example 2 | ₹1,00,000/month | 7 years 7 months | 8 years | ₹4,61,538 |
For government employees, gratuity is calculated based on completed six-month periods of qualifying service. Therefore, the gratuity amount does not change merely because you cross from 7 years 6 months to 7 years 7 months.
| Scenario | Last-Drawn Emoluments | Actual Service | Service Counted | Gratuity |
|---|---|---|---|---|
| Example 1 | ₹1,00,000/month | 7 years 6 months | 7 years 6 months | ₹3,75,000 |
| Example 2 | ₹1,00,000/month | 7 years 7 months | 7 years 7 months | ₹3,75,000 |
In the case of death or disablement, the gratuity amount will be calculated based on your service period up to the date of death or disablement.
Is Gratuity Included in Your Salary or CTC?
For government employees, gratuity is generally not included as a separate component in the total monthly salary payable.
For private employees, some employers include the estimated gratuity amount as a component of the total CTC. However, it is not paid to you every month along with your salary. You will also not receive the gratuity amount every year. You will receive gratuity once you become eligible and gratuity becomes payable.
When Will You Get Gratuity?
You can receive gratuity when your employment ends due to retirement, resignation, disablement, death, or the end of a fixed-term contract. The employer has to pay the gratuity within 30 days from the date it becomes payable. If the employer does not pay it within 30 days, interest may apply for the period of delay.
In case of death, the amount is paid to the nominee or, where there is no nomination, to the legal heirs. If the nominee is a minor, the gratuity amount payable to them may be invested and paid to them when they attain the prescribed age, as per the applicable rules.
Will You Get Gratuity If You Are Laid Off?
Gratuity upon being fired depends on the reason for termination. In cases of major misconduct, the gratuity may be forfeited (reduced or not paid).
Gratuity may be forfeited if you are terminated for:
How is Gratuity Taxed for Government and Private Employees?
1. If you are a government employee, gratuity received on retirement is fully exempt from tax, subject to the applicable rules.
2. If you are a non-government employee, the tax exemption is limited to ₹20 lakh, subject to the applicable conditions. Any amount that is not exempt is added to your income and taxed as per the applicable tax slab.
What is the Maximum Gratuity Amount You Can Receive?
The maximum gratuity amount payable varies for government and non-government employees.
- For government employees, the maximum gratuity payable can be ₹25 lakh, subject to the applicable rules.
- For private and other non-government employees, the maximum gratuity payable under the general gratuity provisions is ₹20 lakh.
If an employer chooses to pay more than ₹20 lakh, they can do so. However, the tax treatment of the amount above the applicable tax exemption limit will depend on the income tax rules.
Gratuity vs Other Employee Benefits
Gratuity is one of several benefits you may receive during or after your employment. The main difference is when and how each benefit is paid.
| Benefit | What it means | When you receive it |
|---|---|---|
| Gratuity | A lump-sum payment based on your last-drawn wages and period of service | When you become eligible and your employment ends |
| EPF | A retirement savings benefit built through contributions from you and your employer | Usually when you make a permitted withdrawal or at retirement |
| ESI | Provides medical and other social security benefits to eligible employees | When you meet the conditions for a specific ESI benefit |
| Pension | A regular income provided under an applicable pension scheme | Usually after meeting the scheme's retirement or other eligibility conditions |
Final Thoughts
Gratuity is a valuable employee benefit that can provide meaningful financial support when your employment comes to an end. It rewards the time you spend with an organisation and can become an important part of your financial planning, especially when you stay with an employer for several years.
With gratuity rules changing and salary structures becoming more complex, knowing what counts towards gratuity can help understand your actual employee benefits better. It is also useful to check your CTC breakup and understand whether gratuity is included in it.
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