Last updated: 5 November 2026
- The formula, explained in plain words
- 8 worked examples, from ₹25,000 to ₹2 lakh basic
- How the new 50% wage rule changes your gratuity
- Eligibility: 5 years, 1 year, 240 days and probation
- Tax on gratuity, with a worked example
- When gratuity can be reduced or forfeited
- How to claim it, and what to do if it's delayed
- The four labour codes, including the Code on Social Security, 2020, were notified on 21 November 2025.
- Gratuity rate: 15 days' wages for every completed year of service.
- Fixed-term employees: eligible after 1 year of service under the contract.
- "Wages" must be at least 50% of total remuneration; excess allowances are added back.
- Tax-free limit: ₹20 lakh (private sector), ₹25 lakh (central government).
Sources: Code on Social Security, 2020; Ministry of Labour & Employment FAQs (2026); Income Tax Act, Section 10(10).
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Say hi to Day on WhatsAppHow Day works →The gratuity formula, in plain words
Your employer owes you 15 days of pay for every full year you've worked. Because a month is treated as 26 working days (Sundays excluded), one day's wage is your monthly wages ÷ 26. Multiply by 15 for each year, and by the number of years.
The formula
Gratuity = (Basic + DA) × 15 × Years of service ÷ 26 Example: (₹40,000) × 15 × 6 ÷ 26 = ₹1,38,462
| Term | What it means | Tip |
|---|---|---|
| Last drawn wages | Basic + DA in your final month (under the new code, adjusted by the 50% rule) | Check your last payslip, not your offer letter |
| 15 | 15 days' wages per completed year | Seasonal establishments use 7 days |
| 26 | Working days in a month | Some employers not covered by the law use 30; see below |
| Years of service | Completed years of continuous service | Many employers round up 6+ months; check policy |
8 worked examples
| Monthly basic + DA | Years | Working | Gratuity |
|---|---|---|---|
| ₹25,000 | 5 | 25,000 × 15 × 5 ÷ 26 | ₹72,115 |
| ₹30,000 | 5 | 30,000 × 15 × 5 ÷ 26 | ₹86,538 |
| ₹40,000 | 6 | 40,000 × 15 × 6 ÷ 26 | ₹1,38,462 |
| ₹50,000 | 7 | 50,000 × 15 × 7 ÷ 26 | ₹2,01,923 |
| ₹60,000 | 8 | 60,000 × 15 × 8 ÷ 26 | ₹2,76,923 |
| ₹80,000 | 10 | 80,000 × 15 × 10 ÷ 26 | ₹4,61,538 |
| ₹1,20,000 | 15 | 1,20,000 × 15 × 15 ÷ 26 | ₹10,38,462 |
| ₹2,00,000 | 20 | 2,00,000 × 15 × 20 ÷ 26 | ₹23,07,692 (statutory cap ₹20 lakh) |
Quick rule of thumb: each year of service is worth about 58% of one month's basic + DA (15 ÷ 26 = 0.577). So five years ≈ 2.9 months of basic.
How the new 50% wage rule changes your gratuity
This is the biggest change for salaried people. Many Indian pay structures kept basic pay low (30–40% of pay) and put the rest into allowances, which kept gratuity and PF low. The Code on Social Security says: if the excluded allowances (HRA, conveyance, overtime, commission and similar) are more than 50% of your total remuneration, the excess is added back to "wages".
Worked example: same salary, old vs new
Total monthly remuneration: ₹1,00,000 Basic + DA: ₹35,000 Allowances (excluded): ₹65,000 → 15,000 above the 50% limit Wages for gratuity = 35,000 + 15,000 = ₹50,000 Old way, 10 years: 35,000 × 15 × 10 ÷ 26 = ₹2,01,923 New way, 10 years: 50,000 × 15 × 10 ÷ 26 = ₹2,88,462 Difference: + ₹86,539
The Labour Ministry's FAQs say gratuity paid on or after 21 November 2025 uses the new definition of wages, based on your last drawn wages. The trade-off: a higher "wages" figure also raises PF, so some people see slightly lower monthly in-hand pay. Check what your offer means for your monthly pay with the in-hand salary calculator.
Who is eligible?
| Situation | Eligible? | Notes |
|---|---|---|
| Permanent employee, 5+ years | Yes | On resignation, retirement or termination |
| Fixed-term employee, 1+ year | Yes | New under the labour codes; an 11-month contract does not qualify |
| Permanent employee, under 5 years | Usually no | See the 240-day note below |
| Death or disablement | Yes, any length of service | Paid to the employee or nominee |
| Contract worker via a contractor | Yes, after 5 years | The contractor (employer) pays, per Ministry FAQs |
| Probation period | Counts as service | Probation is part of continuous service |
The 240-day question: the old Gratuity Act counted a year of "continuous service" if you worked 240 days in it. Some High Court rulings have used this to treat 4 years and 240 days as 5 years. Employers don't all follow this, so if you're close, ask HR in writing before you resign.
Is gratuity taxable?
For private-sector employees, the tax-free amount is the lowest of: (1) the gratuity you actually receive, (2) ₹20 lakh over your whole career, and (3) the formula amount. Anything above is added to your salary income and taxed at your slab rate.
Tax example
Last drawn basic + DA: ₹1,80,000 Service: 25 years Formula amount: 1,80,000 × 15 × 25 ÷ 26 = ₹25,96,154 Employer pays (voluntarily, above the cap): ₹25,96,154 Tax-free = lowest of (25,96,154 ; 20,00,000 ; 25,96,154) = ₹20,00,000 Taxable = ₹5,96,154 (added to salary income)
| Employee type | Tax-free limit |
|---|---|
| Private sector, covered by the gratuity law | Lowest of actual, ₹20 lakh, 15/26 formula |
| Private sector, not covered by the law | Lowest of actual, ₹20 lakh, half a month's average salary (last 10 months) × years |
| Central government employees | Fully exempt; the payout limit is ₹25 lakh |
When gratuity can be reduced or forfeited
- Termination for wilful damage to the employer's property: gratuity can be reduced by the loss caused.
- Termination for riotous or violent conduct: it can be forfeited fully or partly.
- Termination for an offence involving moral turpitude committed during employment: it can be forfeited.
- Resigning normally, being laid off or your company shutting down does not forfeit gratuity.
How to claim gratuity
- Make sure your nomination is on record. Employees are expected to file one after a year of service.
- When you leave, apply to your employer in writing (many companies use an HR portal). Under the old rules this was Form I.
- The employer works out the amount and pays it within 30 days of it becoming due.
- If it's delayed, the employer can owe interest. Follow up in writing first, then approach the labour authority (Controlling Authority) for your area.
Follow-up email if your gratuity is delayed
Subject: Gratuity payment – Priya Sharma (Emp ID 10234) Dear HR team, My last working day was 31 October 2026, after 6 years and 4 months of service. Could you please confirm the gratuity amount and the payment date? As per the Code on Social Security, gratuity is payable within 30 days. Thank you, Priya Sharma
Common mistakes when estimating gratuity
- Using your CTC instead of basic + DA.
- Forgetting the 50% wage rule, which may raise your number.
- Dividing by 30 when your employer is covered by the law (it's 26).
- Assuming a joining bonus or variable pay counts. It usually doesn't.
- Expecting gratuity to carry over to a new employer. It doesn't; each employer pays for your time with them.
Leaving your job? Gratuity is one part of your full and final settlement, which now has a 2-working-day rule for wages. And check how your notice period affects your last working day.
Gratuity for different salary levels (ready reckoner)
Use this table to sanity-check your number. It uses the standard formula (15 × last drawn basic + DA × years ÷ 26) for employees covered by the gratuity law.
| Monthly basic + DA | 5 years | 7 years | 10 years | 15 years | 20 years |
|---|---|---|---|---|---|
| ₹15,000 | ₹43,269 | ₹60,577 | ₹86,538 | ₹1,29,808 | ₹1,73,077 |
| ₹25,000 | ₹72,115 | ₹1,00,962 | ₹1,44,231 | ₹2,16,346 | ₹2,88,462 |
| ₹40,000 | ₹1,15,385 | ₹1,61,538 | ₹2,30,769 | ₹3,46,154 | ₹4,61,538 |
| ₹60,000 | ₹1,73,077 | ₹2,42,308 | ₹3,46,154 | ₹5,19,231 | ₹6,92,308 |
| ₹1,00,000 | ₹2,88,462 | ₹4,03,846 | ₹5,76,923 | ₹8,65,385 | ₹11,53,846 |
| ₹1,50,000 | ₹4,32,692 | ₹6,05,769 | ₹8,65,385 | ₹12,98,077 | ₹17,30,769 |
Values are rounded to the nearest rupee. Anything above ₹20 lakh is capped for private-sector employees by law, though an employer can choose to pay more as ex-gratia.
Gratuity in your CTC: why your offer shows it but your payslip doesn't
Many offer letters list 'gratuity' as a CTC line, usually 4.81% of basic. That is not money you receive every month. The employer sets it aside (or buys a group gratuity policy from an insurer such as LIC) and pays you the lump sum only when you leave after becoming eligible.
So if your CTC is ₹9 LPA with ₹21,645 shown as gratuity, your monthly in-hand is calculated without that ₹21,645. Leave before eligibility and you never get it. This is one reason two offers with the same CTC can feel very different in hand.
| Where you see it | What it means |
|---|---|
| Offer letter / CTC breakup | Annual provision, about 4.81% of basic (15 ÷ 26 ÷ 12) |
| Monthly payslip | Usually not shown, or shown as an employer contribution only |
| Form 16 | Not taxed while it sits with the employer |
| Full and final settlement | Paid as one lump sum if you are eligible |
If your employer delays or refuses to pay
- Write to HR and payroll asking for the gratuity calculation in writing. Quote your joining date, last day and last drawn basic + DA.
- If there's no reply within 30 days of your last day, the employer owes simple interest on the delayed amount, at a rate notified by the government.
- File a claim with the Controlling Authority (usually the Assistant or Deputy Labour Commissioner for your area). Many states accept this online through their labour department portal.
- Keep copies of your appointment letter, payslips, relieving letter and every email. These decide most disputes.
Gratuity is often paid as part of your full and final settlement, so check that statement line by line before you sign it.
FAQs
What is the formula for gratuity calculation?
Last drawn monthly wages (basic + DA, adjusted by the 50% rule) × 15 × completed years of service ÷ 26.
How much gratuity will I get after 5 years?
About 2.9 months of basic + DA. For example, ₹30,000 basic + DA for 5 years gives ₹86,538.
Am I eligible for gratuity before 5 years?
Permanent employees usually need 5 years. Fixed-term employees qualify after 1 year, and it's payable for death or disablement at any point. Some courts have counted 4 years and 240 days as 5 years.
Does the new labour code increase gratuity?
Often yes. If your allowances were more than half your pay, the excess is added to wages, raising gratuity. It applies to gratuity paid on or after 21 November 2025.
How much gratuity is tax-free?
For private-sector employees, the lowest of the actual amount, ₹20 lakh and the formula amount. Central government employees are fully exempt.
When must gratuity be paid?
Within 30 days of it becoming payable. Delays can attract interest.
Is gratuity part of CTC?
Many companies show a gratuity provision (about 4.81% of basic) in CTC, but you only receive it if you become eligible.
Can gratuity be forfeited?
Only in specific cases, such as termination for wilful damage, violent conduct or an offence involving moral turpitude.
Does probation count for gratuity?
Yes. Probation is part of continuous service.
What is the maximum gratuity limit?
The statutory limit is ₹20 lakh for private-sector employees. Employers can pay more voluntarily, but the excess is taxable.
