Gratuity: the formula, who qualifies and what changed in 2025
The 15/26 gratuity formula worked through, how years of service are rounded, the ₹20 lakh cap and tax exemption, and what the labour codes changed.
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In short
- Gratuity is wages × 15 × years ÷ 26. On ₹50,000 a month over 9 counted years that is ₹2,59,615.
- For an employer covered by the law, a part-year of service over six months counts as a full year; six months exactly does not.
- A permanent employee qualifies after five years. Since 21 November 2025 a fixed-term employee qualifies after one, and death or disablement needs no minimum.
- Under the labour codes, wages for gratuity cannot be less than half of total pay, which raises gratuity for anyone on a low basic.
- Gratuity is capped at ₹20 lakh, and for private-sector employees it is tax-free up to that amount.
Gratuity is a lump sum an employer pays when employment ends, in recognition of the years served. It is a statutory right rather than a favour: an employee who qualifies is owed it whether or not the appointment letter mentions it, and it cannot be forfeited except in narrow cases of misconduct.
The law behind it changed on 21 November 2025, when the Code on Social Security, 2020 came into force and replaced the Payment of Gratuity Act, 1972. The formula survived the change intact. Who qualifies, and what counts as wages, did not.
The formula
For an employer covered by the law:
Gratuity = wages × 15 × years of service ÷ 26
Wages means the last drawn basic pay plus dearness allowance — not HRA, not special allowances, not bonuses. The 15 is fifteen days' wages for each year of service. The 26 is the number of working days the law assumes in a month, which is why the formula does not simply use half a month's pay.
That choice of 26 rather than 30 matters. Fifteen days out of 26 is 57.7% of a month's wages per year of service, against 50% if the month were taken as 30 days.
On ₹50,000 a month, each counted year is worth ₹28,846. Someone who joined on 1 January 2018 and whose last working day is 11 September 2026 has served 8 years, 8 months and 11 days, which counts as 9 years:
₹50,000 × 15 × 9 ÷ 26 = ₹2,59,615
Counting years of service
The rule for a covered employer is that every completed year counts, and so does a part of a year in excess of six months. Six months exactly is not in excess of six months, so it does not round up; six months and a day does. The last working day is itself a day of service and is counted.
| Joined | Last day | Served | Years counted (covered) | Years counted (not covered) |
|---|---|---|---|---|
| 2020-01-01 | 2025-06-30 | 5y 6m 0d | 5 | 5 |
| 2020-01-01 | 2025-07-01 | 5y 6m 1d | 6 | 5 |
| 2018-04-01 | 2026-09-11 | 8y 5m 11d | 8 | 8 |
| 2018-01-01 | 2026-09-11 | 8y 8m 11d | 9 | 8 |
An employer outside the law does not round at all: only completed years count. The difference between the last two columns can be a whole year's gratuity.
Eligibility is judged on service actually completed, not on the rounded figure. A permanent employee who has served four years and eight months has not completed five years, even though the formula would count the part-year if they had.
Who qualifies
A permanent employee qualifies after five years of continuous service with the same employer. Continuous service is not broken by leave, sickness, an accident, a strike or a lay-off, and the law treats a year in which an employee has worked 240 days — 190 days below ground in a mine — as a year of continuous service.
A fixed-term employee — someone engaged for a set period rather than indefinitely — now qualifies after one year. Under the old Act the five-year rule applied to everyone, which meant contract after contract of four years could end with no gratuity at all. Someone on a fixed-term contract from 1 January 2023 to 11 September 2026 has served three years and eight months: nothing would be due to a permanent employee on those dates (₹0), while the fixed-term employee is owed ₹1,15,385, on 4 counted years.
On death or disablement there is no minimum service. Gratuity is paid to the nominee or legal heirs, calculated on the service up to that point.
Wages, and the labour codes' floor
The codes define wages in a way designed to stop salaries being structured around a small basic. When the parts of pay excluded from wages — allowances and the like — come to more than half of total remuneration, the excess is added back to wages.
In effect, wages cannot be less than half of total pay. On ₹50,000 of basic and DA within total pay of ₹1,20,000 a month, half of total pay is ₹60,000, so gratuity is calculated on ₹60,000:
₹60,000 × 15 × 9 ÷ 26 = ₹3,11,538
That is ₹51,923 more than the same service on a ₹50,000 wage. The calculator applies this floor when total monthly pay is entered, and leaves wages as basic plus DA when it is not.
Employers outside the law
The gratuity law applies to establishments employing ten or more people. An employer below that threshold may still pay gratuity by contract or policy, and when it does the income tax rules value it differently: half a month's average salary for each completed year of service, averaged over the ten months before retirement or resignation.
With the same ₹50,000 and the same dates, that gives:
₹50,000 × 15 × 8 ÷ 30 = ₹2,00,000
— both a smaller factor per year and no rounding of the part-year.
The ₹20 lakh ceiling
Gratuity under the law is capped at ₹20 lakh, however long the service or high the salary. The cap bites sooner than people expect. These are the monthly wages at which it is reached:
| Years counted | Monthly wages that reach ₹20 lakh |
|---|---|
| 10 | ₹3,46,667 |
| 20 | ₹1,73,334 |
| 30 | ₹1,15,556 |
An employer may pay more than the statutory amount as a matter of policy, but the excess is not gratuity the law guarantees, and it is not tax-free.
Tax on gratuity
For employees of the central or a state government, gratuity is fully exempt from income tax. For everyone else, section 10(10) of the Income-tax Act exempts the least of three amounts: the gratuity actually received, ₹20 lakh, and the gratuity worked out by the formula. Anything above that is taxed as salary in the year it is received.
In practice, a statutory gratuity within the cap is entirely tax-free. The exemption is a lifetime limit across employers, so gratuity already exempted from an earlier job reduces what is available later.
Changing jobs before five years
Gratuity does not move with you. A provident fund balance transfers to the next employer's account; service for gratuity is counted with one employer at a time, and a permanent employee who leaves before completing five years takes nothing from that job.
That makes the last months before the five-year mark worth more than any others. Someone who joined on 1 October 2021 on ₹50,000 of basic pay and resigns with a last working day of 11 September 2026 has served 4 years, 11 months and 11 days — less than three weeks short of five years — and is owed ₹0. Staying until 30 September 2026 completes the five years, and ₹1,44,231 becomes payable.
It is also the right way to read an offer letter that counts gratuity inside the CTC. The figure is a provision the employer makes each year, not money the employee receives, and it becomes real only when the service qualifies. For anyone on a permanent contract who expects to move within five years, it belongs outside the comparison between offers.
What this calculator assumes
- Wages are the last drawn basic pay plus dearness allowance, raised to half of total monthly pay when that is entered and higher.
- Service runs from the date of joining to the last working day inclusive, with years, months and days counted on the calendar.
- For a covered employer a part-year over six months counts as a year; for an employer outside the law only completed years count.
- Eligibility uses completed service: five years for a permanent employee, one for a fixed-term employee, none on death or disablement.
- The amount payable is capped at ₹20 lakh. Government employees' separate pension-rule gratuity is not modelled.