Gratuity and HRA: How They Are Calculated (With Examples)
Updated 07 Jun 2026
Gratuity and House Rent Allowance (HRA) are two parts of your salary package that employees often misunderstand. One is a reward for long service that you receive when you leave an employer; the other is a monthly allowance that can reduce your tax if you pay rent. Both involve specific formulas, and getting them wrong can cost you money or lead to incorrect tax filing. This guide explains what each one is, who qualifies, and exactly how the numbers are worked out, with simple examples you can follow. To run your own figures quickly, you can use the Gratuity Calculator and the HRA Calculator alongside this article.
Gratuity: A Reward for Long Service
Gratuity is a lump-sum amount your employer pays you as a token of appreciation for continuous service. For employees covered by the Payment of Gratuity Act, it is a legal entitlement, not a favour. It is generally payable after at least five years of continuous service with the same employer. There are limited exceptions to this five-year rule, such as when service ends due to death or disability, in which case the minimum period may not apply.
The gratuity formula
For employees covered by the Payment of Gratuity Act, gratuity is calculated as:
Gratuity = (15 × last drawn monthly salary × number of completed years of service) / 26
Here, "salary" means your basic salary plus dearness allowance (DA). It does not include allowances such as HRA, bonuses or other components. The figure 26 represents the assumed number of working days in a month, and 15 represents 15 days' wages for each completed year of service.
Worked example for gratuity
Suppose your last drawn salary (basic + DA) is ₹50,000 per month and you have completed 10 years of service. The calculation runs as follows:
- Multiply 15 days by the monthly salary: 15 × 50,000 = 7,50,000.
- Multiply by the number of completed years: 7,50,000 × 10 = 75,00,000.
- Divide by 26: 75,00,000 / 26 = ₹2,88,461 approximately.
So, in this case, the gratuity payable works out to roughly ₹2,88,461. You can confirm this and try other figures using the Gratuity Calculator.
Tax exemption on gratuity
Gratuity received is eligible for tax exemption up to a maximum limit. This cap is commonly cited as ₹20,00,000, but limits and rules can change over time. You should verify the current exemption ceiling and the conditions that apply to your category of employment on the official income tax website, incometax.gov.in, before relying on any figure for filing purposes.
HRA: Reducing Tax on Rent You Pay
House Rent Allowance is a component of your salary meant to cover the cost of rented accommodation. If you actually live in rented housing and pay rent, part of your HRA can be exempt from tax. This benefit is available to salaried individuals under the old tax regime. Under the new tax regime, the HRA exemption is generally not available, so this section applies mainly if you have opted for the old regime. Always verify the current position, as rules are revised from time to time.
The three-part "least of" rule
The exempt portion of HRA is the least of the following three amounts:
- Actual HRA received from your employer.
- 50% of salary if you live in a metro city, or 40% of salary if you live in a non-metro city.
- Actual rent paid minus 10% of salary.
As with gratuity, "salary" here means basic plus DA. Whichever of these three figures is smallest is the amount exempt from tax; the remainder of your HRA is taxable.
Worked example for HRA
Suppose your basic + DA is ₹40,000 per month, the HRA you receive is ₹20,000 per month, the rent you pay is ₹18,000 per month, and you live in a metro city. Compute the three values on a monthly basis:
| Component | Calculation | Amount |
|---|---|---|
| (a) Actual HRA received | Given | ₹20,000 |
| (b) 50% of salary (metro) | 50% of 40,000 | ₹20,000 |
| (c) Rent paid minus 10% of salary | 18,000 − (10% of 40,000 = 4,000) | ₹14,000 |
The least of ₹20,000, ₹20,000 and ₹14,000 is ₹14,000 per month. That amount is exempt from tax, and the remaining ₹6,000 of HRA each month is taxable. You can test your own combination of salary, rent and city using the HRA Calculator.
Documents you may need
To claim HRA, you must actually pay rent. Keep proof such as rent receipts and your rent agreement. Where the annual rent crosses the prescribed threshold, you may also need to report your landlord's PAN. Maintaining these records makes it far easier to support your claim if it is ever questioned.
Frequently Asked Questions
- Can I claim both gratuity and HRA benefits? Yes. They are separate components. Gratuity relates to a lump sum at the end of service, while HRA relates to ongoing rent during employment, so they do not affect each other.
- Is HRA exemption available under the new tax regime? Generally, no. The HRA exemption is tied to the old regime. If you have opted for the new regime, you usually cannot claim it, so weigh this when choosing your regime and verify the current rules.
- Does gratuity require exactly five years of service? Generally, yes, at least five years of continuous service is needed. Limited exceptions apply, such as death or disability, where the minimum period may not be required.
- What salary is used in these formulas? Both the gratuity formula and the HRA "least of" rule use salary as basic plus dearness allowance (DA), not your full gross or cost-to-company figure.
Conclusion
Gratuity and HRA reward different things, but both follow clear, fixed rules once you know what counts as "salary" and which formula to apply. Gratuity uses the 15/26 calculation over completed years, while HRA uses the least of three values. Because tax limits and regime rules change, treat the figures here as a guide and confirm the current caps and conditions on incometax.gov.in. When you are ready to run your own numbers, start with the Gratuity Calculator, check your rent benefit with the HRA Calculator, and see the overall impact using the Income Tax Calculator.