Understand how companies calculate gratuity using Basic salary vs CTC. Learn why your gratuity might be lower than expected and how salary restructuring affects your payout.
"My CTC is ₹20 lakh but my gratuity is only ₹2.5 lakh for 10 years?" This confusion is common. Here's how employers actually calculate gratuity—and why it's often lower than expected.
The Key Formula
Gratuity = (15 × Last Drawn Salary × Years of Service) ÷ 26
The crucial point: "Last Drawn Salary" = Basic + DA only—not your CTC or gross salary.
Calculate your gratuity: Use our Gratuity Calculator.
CTC vs Basic Salary: Why It Matters
Typical CTC Breakdown
| Component |
Amount |
% of CTC |
Used for Gratuity? |
| Basic Salary |
₹6,00,000 |
30% |
Yes |
| HRA |
₹3,00,000 |
15% |
No |
| Special Allowance |
₹5,00,000 |
25% |
No |
| PF (Employer) |
₹72,000 |
3.6% |
No |
| Gratuity Provision |
₹28,846 |
1.4% |
No |
| Other Benefits |
₹5,00,000 |
25% |
No |
| Total CTC |
₹20,00,000 |
100% |
|
| Gratuity Base |
₹6,00,000 |
30% |
|
Gratuity Calculation on This CTC
| Detail |
Value |
| CTC |
₹20,00,000 |
| Basic (30% of CTC) |
₹6,00,000/year = ₹50,000/month |
| DA |
₹0 (most private companies) |
| Years of Service |
10 |
| Gratuity |
(15 × 50,000 × 10) ÷ 26 = ₹2,88,462 |
Not ₹20L based gratuity, but ₹2.88L!
Why Companies Keep Basic Low
Financial Impact on Employer
| Higher Basic Means |
Cost to Company |
| Higher EPF contribution |
12% of Basic |
| Higher gratuity liability |
4.81% of Basic per year |
| Higher bonus obligation |
Based on Basic |
| Higher leave encashment |
Based on Basic |
Example: ₹20L CTC with Different Basic
| Basic % |
Monthly Basic |
Annual EPF (Employer) |
Gratuity/Year |
| 30% |
₹50,000 |
₹72,000 |
₹34,615 |
| 40% |
₹66,667 |
₹96,000 |
₹46,154 |
| 50% |
₹83,333 |
₹1,20,000 |
₹57,692 |
Higher Basic = Higher employer costs. That's why companies minimize it.
The New Labour Code Impact
What's Changing
The Social Security Code 2020 (effective 2025) mandates:
| Old Practice |
New Requirement |
| Basic can be any % |
Basic must be at least 50% of CTC |
| Companies kept Basic at 30-40% |
Will need to restructure |
Impact on Your Gratuity
| CTC |
Old Basic (30%) |
New Basic (50%) |
Gratuity Change |
| ₹15L |
₹4.5L |
₹7.5L |
+67% |
| ₹20L |
₹6L |
₹10L |
+67% |
| ₹30L |
₹9L |
₹15L |
+67% |
Your gratuity could increase significantly once new labour codes are fully implemented.
Gratuity Provision in CTC
What "Gratuity" in CTC Means
Many offer letters show "Gratuity" as a CTC component. This is:
| What It Is |
What It Isn't |
| Company's provisioning |
Your guaranteed payment |
| Accounting entry |
Claimable if <5 years |
| Future liability estimate |
Separate from formula calculation |
Example: CTC Shows ₹35,000 Gratuity
| If You Leave At |
Actual Gratuity |
CTC Provision Matters? |
| 3 years |
₹0 |
No (not eligible) |
| 5 years |
Formula-based |
No (formula decides) |
| 10 years |
Formula-based |
No (always formula) |
The CTC gratuity amount is just budgeting—actual payment is always by formula.
Different Employer Types
Large IT Companies
| Company Type |
Typical Basic |
Gratuity Base |
| TCS, Infosys, Wipro |
35-45% of CTC |
Basic only (no DA) |
Manufacturing Companies
| Company Type |
Typical Basic |
Gratuity Base |
| Tata, L&T, etc. |
40-50% of CTC |
Basic + DA (DA common) |
Startups
| Company Type |
Typical Basic |
Gratuity Base |
| Early-stage |
30-40% |
Basic only |
| Growth-stage |
35-45% |
Basic only |
Government/PSU
| Entity Type |
Typical Basic |
Gratuity Base |
| Central Govt |
Fixed pay bands |
Basic + DA (DA ~50%) |
| PSUs |
Pay commission scales |
Basic + DA |
Salary Restructuring Traps
What Employers Sometimes Do
| Practice |
Impact on You |
| Increase "Special Allowance" |
No impact on gratuity |
| Reduce Basic, add "Flexible Benefits" |
Lower gratuity base |
| Show higher CTC, same Basic |
Gratuity unchanged |
Red Flags in Offer Letters
| Warning Sign |
What to Check |
| Very low Basic (under 30%) |
Ask for breakdown |
| "Flexible Benefits Package" |
Ensure Basic is clear |
| Gratuity provision in CTC |
Doesn't guarantee amount |
| No DA mentioned |
Typical for IT, but verify |
Calculating Your Gratuity from Offer Letter
Step-by-Step
| Step |
Action |
Example |
| 1 |
Find "Basic Salary" |
₹6,00,000/year |
| 2 |
Find "Dearness Allowance" |
₹0 (most private) |
| 3 |
Calculate monthly |
₹50,000 + ₹0 = ₹50,000 |
| 4 |
Estimate gratuity |
(15 × 50,000 × years) ÷ 26 |
Quick Gratuity Estimate
For no DA (typical private sector):
Gratuity ≈ Monthly Basic × 0.577 × Years
| Monthly Basic |
5 Years |
10 Years |
15 Years |
| ₹30,000 |
₹86,538 |
₹1,73,077 |
₹2,59,615 |
| ₹50,000 |
₹1,44,231 |
₹2,88,462 |
₹4,32,692 |
| ₹75,000 |
₹2,16,346 |
₹4,32,692 |
₹6,49,038 |
| ₹1,00,000 |
₹2,88,462 |
₹5,76,923 |
₹8,65,385 |
How to Negotiate Better Gratuity
During Offer Stage
| Negotiation Point |
Approach |
| Request higher Basic |
"Can we restructure to 40% Basic?" |
| Trade other components |
"I'll take lower HRA for higher Basic" |
| Understand total impact |
Higher Basic = higher PF, gratuity, bonus |
What's Negotiable
| Usually Negotiable |
Usually Fixed |
| CTC split ratio |
Gratuity formula |
| HRA vs Basic balance |
Tax treatment |
| Special allowances |
EPF percentage |
Negotiation Example
| Original Offer |
Negotiated Offer |
| CTC: ₹20L |
CTC: ₹20L |
| Basic: ₹5L (25%) |
Basic: ₹8L (40%) |
| HRA: ₹3L |
HRA: ₹2.4L (30% of new Basic) |
| Special: ₹8L |
Special: ₹5.6L |
| Gratuity at 10 yrs |
|
| ₹2,40,385 |
₹3,84,615 (+₹1.44L) |
The 26 vs 30 Divisor
Gratuity Act Covered Employers
| Divisor |
Calculation |
Result |
| 26 |
(15 × ₹50K × 10) ÷ 26 |
₹2,88,462 |
Non-Act Employers
| Divisor |
Calculation |
Result |
| 30 |
(15 × ₹50K × 10) ÷ 30 |
₹2,50,000 |
Act-covered employers (10+ employees) give ~15% more gratuity.
Common Misconceptions
"My in-hand salary is ₹1L, so my gratuity base is ₹1L"
Wrong. In-hand includes HRA, allowances, etc. Only Basic + DA counts.
"Company said gratuity is part of CTC, so I already get it"
Wrong. CTC gratuity is a provision/liability, not payment. You only get it after 5 years, calculated by formula.
"I should ask for higher CTC for better gratuity"
Partially wrong. Higher CTC with same Basic % doesn't help. Ask for higher Basic percentage.
"Government employees get same gratuity as private"
Different calculation. Government employees have DA (often 50%+), so their gratuity base is much higher.
Key Takeaways
| Point |
Reality |
| Gratuity is on Basic + DA |
Not CTC, not gross, not in-hand |
| Most private: Basic = 30-40% of CTC |
Your gratuity is lower than you think |
| New Labour Code |
May mandate 50% Basic |
| CTC gratuity provision |
Just accounting, not guaranteed |
| Negotiate Basic % |
Best way to increase gratuity |
Calculate your actual gratuity: Use our Gratuity Calculator—enter your Basic salary, not CTC, for accurate results.
