How to Calculate Gratuity in 2026: Formula, New Labour Code Rules and Worked Examples

Whether you are an employee checking your full-and-final settlement or an MSME owner budgeting for an exit, gratuity is one of the largest single payouts in Indian payroll. The rules changed on 21 November 2025, when the Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972. This guide gives you the exact formula, the new eligibility rules for permanent and fixed-term staff, the 50% wages rule, tax treatment, and five worked ₹ examples you can copy.

Quick answer

Gratuity = last drawn monthly wages (basic + DA) × 15 ÷ 26 × years of service. Count a final part-year of more than six months as a full year. Permanent employees qualify after 5 years of continuous service; fixed-term employees qualify after 1 year under the Labour Codes in force since 21 November 2025.

• Example: ₹40,000 wages × 15 ÷ 26 × 8 years = ₹1,84,615

• Statutory maximum: ₹20 lakh; private-sector tax-free limit: ₹20 lakh (lifetime)

• If allowances exceed 50% of total pay, the excess is added to wages — gratuity goes up

• Employees not covered by the law: half a month's average salary per completed year

What gratuity is and who must pay it in 2026

Gratuity is a lump sum your employer pays when your employment ends — on resignation, retirement (superannuation), termination, death, disablement from accident or disease, or the expiry of a fixed-term contract. It rewards long service and is paid entirely by the employer; nothing is deducted from your salary for it.

The law applies to factories, mines, plantations, ports, shops and other establishments that employ 10 or more people (the same threshold as the 1972 Act). Smaller employers and many others still pay gratuity voluntarily or under employment contracts — that is where the "non-covered" formula further down comes in.

Since 21 November 2025, the governing law is Section 53 of the Code on Social Security, 2020. The core maths did not change: 15 days' wages for every completed year. What changed is who qualifies early and what counts as wages.

Gratuity numbers at a glance (2026)

15/26

Days' wages per year ÷ working days per month

Code on Social Security s.53

5 years

Minimum service — permanent staff

1 year

Minimum service — fixed-term staff

from 21 Nov 2025

₹20 lakh

Maximum statutory gratuity

The gratuity formula, step by step

For a monthly-paid employee covered by the law:

Gratuity = Last drawn wages × 15 × Years of service ÷ 26

• Last drawn wages — the monthly wages you received in your final month: basic pay + dearness allowance (+ retaining allowance, if any), adjusted by the 50% rule explained below.
• 15 — 15 days' wages for every year of service.
• 26 — the law treats a month as 26 working days (four Sundays off), so one day's wage = monthly wages ÷ 26.
• Years of service — completed years, plus one more if the final part-year is more than six months.

That rounding rule matters. 6 years 6 months counts as 6 years; 6 years 7 months counts as 7. The Ministry of Labour's FAQs (30 December 2025) restate it: gratuity is paid for every completed year "or part thereof in excess of six months".

Piece-rated workers use the average of their total wages for the three months before exit, excluding overtime. Seasonal establishments pay 7 days' wages per season instead of 15 days per year.

Worked examples in ₹

Example 1 — Standard resignation

Priya resigns after 8 years 9 months. Her last drawn basic + DA is ₹40,000 a month.

• Service counted: 9 years (9 months is more than six)
• ₹40,000 × 15 ÷ 26 = ₹23,077 (15 days' wages)
• ₹23,077 × 9 = ₹2,07,692

Example 2 — Exactly five years

Rahul's wages are ₹30,000 and he leaves after 5 years 2 months. Service counted is 5 years: ₹30,000 × 15 ÷ 26 × 5 = ₹86,538. Had he stayed one more month past the six-month mark (5 years 7 months), he would have received ₹1,03,846.

Example 3 — Fixed-term contract

A fixed-term technician on a 2-year 3-month contract earns ₹25,000 a month. When the contract ends: service counted is 2 years; ₹25,000 × 15 ÷ 26 × 2 = ₹28,846. Under the old Act, this worker would have received nothing.

New gratuity rules under the Labour Codes

The four Labour Codes took effect on 21 November 2025, replacing 29 older labour laws. Three changes affect gratuity directly.

1. Fixed-term employees qualify after one year

A fixed-term employee (FTE) is hired directly for a set period — not through a contractor. Under the Code, FTEs get the same benefits as permanent staff, and gratuity is payable on the expiry of the contract once they have served 1 year. The Ministry's March 2026 FAQs confirm the year is counted from the start of the contract, so an 11-month contract that simply ends does not earn gratuity. The payout is pro-rata, using the same 15/26 formula.

Permanent employees, by contrast, still need 5 years of continuous service unless employment ends by death or disablement.

2. A uniform definition of "wages" with the 50% rule

"Wages" now means basic pay, dearness allowance and retaining allowance. Allowances such as HRA, conveyance, special allowance and overtime are excluded — but if all the excluded items together exceed 50% of total remuneration, the excess is added back to wages. Bonuses linked to performance, ESOPs and reimbursements are not wages. The Ministry has also clarified that employer PF contributions, gratuity itself and ESI are left out when working out the 50%.

Example (from a CTC-heavy structure): total monthly pay ₹1,00,000 = basic + DA ₹30,000 + allowances ₹70,000. The 50% limit for allowances is ₹50,000, so ₹20,000 is added back. Wages for gratuity become ₹50,000, not ₹30,000. Over 10 years:

• Old base: ₹30,000 × 15 ÷ 26 × 10 = ₹1,73,077
• New base: ₹50,000 × 15 ÷ 26 × 10 = ₹2,88,462

3. From when does the new wage base apply?

According to the Ministry of Labour's FAQs (30.12.2025 and 16.03.2026), gratuity under the Code — including the revised wage definition — applies with effect from 21 November 2025, the date the Codes came into force. Employers whose financial year ends in December were told to make provision as per accounting norms. How earlier years of service interact with the new wage base is still being argued by employers and lawyers, so for large payouts confirm the method with your HR team or a labour-law adviser.

Gratuity rules — before and after the Labour Codes

Point	Payment of Gratuity Act, 1972	Code on Social Security, 2020 (from 21 Nov 2025)
Permanent staff eligibility	5 years continuous service	5 years (unchanged)
Fixed-term staff	5 years — rarely reached	1 year, pro-rata
Wages for the formula	Basic + DA only	Basic + DA + retaining allowance, plus allowances above 50% of pay
Formula	15 ÷ 26 × wages × years	Same
Maximum	₹20 lakh	₹20 lakh (as notified)

Permanent staff eligibility

Payment of Gratuity Act, 1972

5 years continuous service

Code on Social Security, 2020 (from 21 Nov 2025)

5 years (unchanged)

Fixed-term staff

Payment of Gratuity Act, 1972

5 years — rarely reached

Code on Social Security, 2020 (from 21 Nov 2025)

1 year, pro-rata

Wages for the formula

Payment of Gratuity Act, 1972

Basic + DA only

Code on Social Security, 2020 (from 21 Nov 2025)

Basic + DA + retaining allowance, plus allowances above 50% of pay

Formula

Payment of Gratuity Act, 1972

15 ÷ 26 × wages × years

Code on Social Security, 2020 (from 21 Nov 2025)

Same

Maximum

Payment of Gratuity Act, 1972

₹20 lakh

Code on Social Security, 2020 (from 21 Nov 2025)

₹20 lakh (as notified)

Gratuity for employees not covered by the law

If your employer has fewer than 10 employees and is not otherwise covered, gratuity is not compulsory — but many pay it under the appointment letter or company policy. For income-tax purposes, such gratuity is measured differently:

Exempt gratuity = ½ × average monthly salary × completed years of service

• Average salary = average of basic + DA for the 10 months immediately before the month you leave.
• Completed years only — any part-year is ignored, unlike the six-month round-up for covered employees.

Example 4: Meena leaves a 6-person design studio after 12 years 9 months. Her average salary for the last 10 months is ₹50,000. Tax-exempt gratuity = ½ × ₹50,000 × 12 = ₹3,00,000. If the studio pays her ₹3,50,000 as a goodwill gesture, ₹50,000 is taxable as salary.

Is gratuity taxable? The 2026 rules

How much of your gratuity is tax-free depends on who you work for:

The ₹20 lakh cap is a lifetime limit: if you already claimed an exemption with a previous employer, only the balance is available now. The limit was raised from ₹10 lakh for exits on or after 29 March 2018.

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026; the gratuity exemption (section 10(10) of the old Act) continues with the same limit. The exemption is allowed under both the old and the new tax regime.

Example 5 — gratuity above the limit: a senior manager covered by the law receives ₹26,00,000 under a company policy. The formula amount is ₹24,00,000. Tax-free = lowest of ₹26 lakh, ₹24 lakh and ₹20 lakh = ₹20 lakh. The remaining ₹6 lakh is added to salary income and taxed at slab rates; the employer deducts TDS on it. Because a large lump sum can push you into a higher slab, you can claim relief under section 89 by filing Form 10E before your return — use our TDS calculator to estimate the deduction.

Central Government employees work under separate pension rules, where the retirement and death gratuity ceiling is ₹25 lakh for those retiring or dying on or after 1 January 2024.

When and how gratuity is paid

From exit to payout

Step 1

Last working day

Step 2

Employee or nominee claims

Step 3

Employer computes 15/26 × wages × years

Step 4

Payment

within 30 days of becoming payable

Step 5

Dispute → Controlling Authority

The employer must work out the amount and pay it within 30 days of it becoming payable; delays attract simple interest. If the employer disputes eligibility or the amount, it must still pay the undisputed part, and you can approach the Controlling Authority (usually the Labour Department of your state) for the rest. Nominations should be on file — gratuity goes to the nominee or legal heirs on death, and a minor's share is invested until they turn 18.

When gratuity can be forfeited

Under Section 53, gratuity can be withheld only if your services were terminated for:

• Wilful act or negligence causing damage, loss or destruction of the employer's property — forfeited only to the extent of the loss.
• Riotous or disorderly conduct or any other act of violence — wholly or partly.
• An offence involving moral turpitude committed in the course of employment — wholly or partly.

Resignation, retrenchment, a layoff or a notice-period dispute is not a ground for forfeiture.

Checklist for employers and employees

Before you sign the full-and-final settlement

0/7

• Confirm exact service dates — the six-month round-up can add a full year
• Check last drawn basic + DA, and whether allowances exceed 50% of total pay
• Fixed-term? Confirm the contract ran at least one year from its start date
• Verify the nomination on record with HR
• Ask for the computation sheet: wages, years counted, formula used
• Check the tax split: exempt portion vs taxable portion and TDS deducted
• Employers: provide for gratuity liability in your books every year (actuarial valuation or a group gratuity policy)

Share Print

Common mistakes. Using CTC or gross salary instead of wages; dividing by 30 instead of 26 for covered employees; forgetting the six-month round-up; applying the covered-employee formula to a non-covered employer (or vice versa); and treating the ₹20 lakh tax limit as per employer rather than lifetime.

Official links

• Ministry of Labour — FAQs on Labour Codes (30.12.2025)Gratuity calculation, wages definition, 50% rule
• Ministry of Labour — Additional FAQs (16.03.2026)Fixed-term employees, prospective application
• PIB — Labour Codes in force from 21 Nov 2025Summary of all four Codes
• PIB — Central Government gratuity ceiling ₹25 lakhDoPPW OM, effective 1 Jan 2024
• Income Tax Department — gratuity exemption limit FAQ₹20 lakh exemption

What to do next

If you run payroll, show basic, DA and every allowance as separate lines so the 50% test is easy to check — our free salary slip generator does this and also handles PF and professional tax. If you are leaving a job, run the 15/26 formula on your own numbers before your exit interview and ask HR for the computation sheet.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

How is gratuity calculated for 5 years of service?

Multiply your last drawn monthly wages (basic + DA) by 15, divide by 26 and multiply by 5. With wages of ₹30,000 that is ₹30,000 × 15 ÷ 26 × 5 = ₹86,538. If you served 5 years and 7 months, the extra 7 months round up and you are paid for 6 years (₹1,03,846). Five completed years is the minimum for permanent employees covered by the law.

Is gratuity payable after 1 year now?

Only for fixed-term employees. Since the Labour Codes took effect on 21 November 2025, a fixed-term employee who completes 1 year of service under the contract gets pro-rata gratuity. Permanent employees still need 5 years of continuous service, except when employment ends because of death or disablement.

Is gratuity calculated on basic salary or CTC?

On 'wages', not CTC. Under the Code on Social Security that means basic pay, dearness allowance and retaining allowance. But if all excluded allowances together exceed 50% of your total remuneration, the excess is added back to wages. For many CTC-heavy salary structures that raises the gratuity base from 21 November 2025.

How much gratuity is tax-free?

For private-sector employees, the exempt amount is the lowest of the formula amount, the gratuity actually received and ₹20 lakh — a lifetime cap across all employers. Anything above it is taxed as salary at your slab rate. Gratuity received by Central and State Government employees is fully exempt.

Can an employer refuse to pay gratuity?

Only in narrow cases. Gratuity can be forfeited wholly or partly if you were terminated for riotous or disorderly conduct, violence, or an offence involving moral turpitude in the course of employment, and partly to recover loss from wilful damage to the employer's property. Resigning, being laid off or retiring does not take away gratuity you have earned.

Is there a ceiling on gratuity?

Yes. Statutory gratuity under the Code on Social Security is capped at ₹20 lakh, the amount currently notified by the Central Government. Employers may pay more under a contract, policy or settlement. For Central Government employees the separate ceiling is ₹25 lakh from 1 January 2024.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 7 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Government makes the four Labour Codes effective (press release, 21 Nov 2025) — PIB — Ministry of Labour & Employment · accessed 7 October 2026
2. 2.FAQs on Labour Codes (as on 30.12.2025) — Ministry of Labour & Employment · accessed 7 October 2026
3. 3.Additional FAQs on Labour Codes (as on 16.03.2026) — Ministry of Labour & Employment · accessed 7 October 2026
4. 4.Code on Social Security, 2020 — Section 53 (Payment of gratuity) — Indian Kanoon (text of the Act) · accessed 7 October 2026
5. 5.DoPPW raises Retirement and Death Gratuity ceiling to ₹25 lakh — PIB — Ministry of Personnel, Public Grievances & Pensions · accessed 7 October 2026
6. 6.Effective date of enhancement of gratuity exemption limit from ₹10 lakh to ₹20 lakh — Income Tax Department · accessed 7 October 2026
7. 7.Income tax exemption on gratuity — ClearTax · accessed 7 October 2026
8. 8.Ministry FAQs on the four Labour Codes — thematic analysis — SCC Online Blog · accessed 7 October 2026