How is gratuity calculated?
Gratuity is a lump sum an employer pays an employee for long service — on resignation, retirement, death or disability.
Formula (employees covered by the Gratuity Act / Code on Social Security)Gratuity = 15 × last drawn wages (basic + DA) × years of service ÷ 26
- If the last year of service has more than six months, it counts as a full year (7 years 8 months = 8 years).
- Permanent employees need at least five years of service. Fixed-term employees become eligible after one year under the new Labour Code (in force from 21 November 2025).
- 50% wage rule: under the new Labour Code, basic pay plus DA is treated as at least 50% of total pay, which increases gratuity for many employees.
- Gratuity is tax-free up to ₹20 lakh for private-sector employees and fully tax-free for government employees.
Example
Last drawn basic + DA of ₹50,000 and 7 years 8 months of service: 15 × 50,000 × 8 ÷ 26 = ₹2,30,769.
How is the HRA exemption calculated?
If you live in rented accommodation and receive HRA as part of your salary, part of it is tax-free under the old tax regime. The exemption is the lowest of these three amounts:
HRA exemption = the lowest of① Actual HRA received · ② Rent paid − 10% of (basic + DA) · ③ 50% of (basic + DA) in a metro city, 40% elsewhere
New rule (Income-tax Rules, 2026): from 1 April 2026, Bengaluru, Hyderabad, Pune and Ahmedabad have been added to the 50% list. The 50% limit now applies in eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.
- The HRA exemption is available only under the old tax regime, not the new regime.
- If your annual rent exceeds ₹1 lakh, you must give your landlord's PAN to your employer.
- Keep your rent receipts and rent agreement safely.
Frequently asked questions
What is the formula for gratuity?
Gratuity = 15 × last drawn basic + DA × years of service ÷ 26. If the last year has more than six months of service, it is counted as a full year.
After how many years is gratuity paid?
After five years for permanent employees. Under the new Labour Code, fixed-term employees become eligible after one year. No minimum applies on death or disability.
Is gratuity taxable?
Gratuity is tax-free up to ₹20 lakh over a career for private-sector employees, and fully tax-free for government employees.
What changed for gratuity under the new Labour Code?
The definition of wages changed — basic pay plus DA is treated as at least 50% of total pay — and fixed-term employees became eligible after one year. These rules apply from 21 November 2025.
How is the HRA exemption calculated?
It is the lowest of: actual HRA received, rent paid minus 10% of basic pay, and 50% (metro) or 40% (non-metro) of basic pay.
Which cities count as metro cities for HRA?
From Tax Year 2026-27, eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.
Can I claim HRA under the new tax regime?
No. The HRA exemption is available only under the old regime. Use our Income Tax Calculator to compare both regimes.
Can I claim HRA by paying rent to my parents?
Yes, if the house is owned by your parents and you actually pay them rent, preferably by bank transfer. Your parents must show that rent as their income.