If you have worked at a company for a few years, a sizeable sum may be waiting for you when you leave: your gratuity. Since 21 November 2025, gratuity rules come from the Code on Social Security, 2020, which replaced the old Payment of Gratuity Act. The formula is the same, but the new rules can increase your payout – and let some workers claim it after just one year. This guide explains the gratuity calculation formula with real examples.
What Is Gratuity?
Gratuity is a lump-sum payment an employer makes to an employee as a reward for long, continuous service. It is paid when you resign, retire, are retrenched, or – sadly – to your nominee if you die in service. It is not a bonus and not a favour: once you meet the conditions, your employer is legally bound to pay it within 30 days.
Every establishment with 10 or more employees on any day in the previous 12 months is covered. Once an employer is covered, it stays covered even if the number of employees falls below ten later.
The Gratuity Formula Explained
Gratuity = 15 × Last drawn wages × Years of service ÷ 26
- 15 – you get 15 days of wages for every completed year of service.
- 26 – the number of working days in a month (30 days minus 4 Sundays). Dividing monthly wages by 26 gives one day's wage.
- Last drawn wages – your most recent monthly Basic pay + Dearness Allowance. Commission, HRA, bonus and overtime are not included – but see the 50% rule below.
- Years of service – completed years, plus one more year if the final part-year is more than six months.
In practice, 15 ÷ 26 = 0.577, so you receive a little more than half a month's wages for every year you worked.
Worked Examples
Example 1: Basic + DA of ₹50,000, 10 years
Example 2: ₹30,000 wages, 7 years 8 months
The 8 months is more than six months, so it counts as a full year: 15 × 30,000 × 8 ÷ 26 = ₹1,38,462. Had you left after 7 years and 6 months, only 7 years would count and you would get ₹1,21,154. Leaving a few weeks later can be worth over ₹17,000.
Example 3: ₹1,00,000 wages, long career
Gratuity grows in a straight line with your years of service and your final salary:
What Changed Under the New Labour Code
The 50% wage rule
Many employers kept Basic pay low – sometimes 30%–35% of CTC – and paid the rest as allowances, which reduced gratuity and PF. The Code closes this gap. If the allowances excluded from "wages" add up to more than 50% of your total remuneration, the excess is added back to wages. So wages for gratuity must be at least half of your total pay.
Take Arjun, who earns ₹1,00,000 a month, of which Basic + DA is ₹35,000. After 10 years:
Under the old Act, his gratuity was 15 × 35,000 × 10 ÷ 26 = ₹2,01,923. Under the Code, wages become ₹50,000 and gratuity becomes ₹2,88,462. Many companies have restructured salaries since November 2025, so check your new payslip.
Gratuity after one year for fixed-term employees
A fixed-term employee – someone hired directly by the company for a specific period – now gets gratuity on a pro-rata basis after just one year of continuous service. This is a big change for project, seasonal and contract-based roles in IT, manufacturing and media. Permanent employees still need five years.
Who Is Eligible?
| Situation | Minimum service |
|---|---|
| Permanent employee – resignation, retirement, retrenchment | 5 years |
| Fixed-term employee – end of contract | 1 year |
| Death or disablement due to accident or illness | None |
| Working journalists | 3 years |
If Your Employer Is Not Covered
Small employers with fewer than ten staff are not bound by the gratuity law, but many still pay gratuity by policy. For tax purposes, the formula for such employees is 15 ÷ 30 × average wages of the last 10 months × completed years. Here a month is taken as 30 days and part-years are ignored. For ₹50,000 wages and 10 years, that gives ₹2,50,000 – about ₹38,000 less than the covered formula.
Government Employees
Central government employees get retirement gratuity under the CCS (Pension) Rules: one-fourth of a month's Basic + DA for every completed six months of service, up to 16.5 times monthly emoluments and a ceiling of ₹25 lakh (raised from ₹20 lakh on 1 January 2024 when DA touched 50%). A central employee retiring after 33 years with Basic + DA of ₹1,20,000 gets 16.5 × 1,20,000 = ₹19,80,000, fully tax-free. If you are a government employee, find your retirement date with our retirement date calculator.
Is Gratuity Taxable?
For government employees, gratuity is fully exempt. For everyone else, the tax-free amount is the lowest of:
- The gratuity actually received,
- The amount worked out by the formula, and
- ₹20 lakh – a lifetime limit across all employers.
Anything above is added to your salary income and taxed at your slab rate. If a generous employer pays you ₹24 lakh, ₹4 lakh is taxable. The ₹25 lakh figure in the news is the central government's payment ceiling, not a higher tax limit for private employees. Since gratuity is often received in your final year, use the income tax calculator to compare the old and new regimes for that year.
How to Claim Your Gratuity
- Apply in writing to your employer, usually through HR, soon after your last working day. Many companies process it automatically with your full and final settlement.
- Check that the employer has used the correct last drawn wages (including the 50% rule) and service length.
- The employer must pay within 30 days. Late payment carries simple interest.
- If the employer refuses or underpays, file an application with the controlling authority (usually the Assistant Labour Commissioner) in your area.
- Keep your nomination up to date so your family can claim quickly if needed.
Gratuity, EPF and NPS together form most people's retirement money. Once you know your gratuity, see how your provident fund and pension add up with the EPF calculator and NPS calculator.
Frequently Asked Questions
What is the formula for gratuity?
Gratuity = 15 × last drawn monthly wages (Basic + DA) × years of service ÷ 26, for employers covered by the Code on Social Security. A part-year of more than six months counts as a full year.
How much gratuity will I get for 5 years with ₹30,000 basic?
With ₹30,000 Basic + DA and 5 years of service, gratuity is 15 × 30,000 × 5 ÷ 26 = ₹86,538.
Can I get gratuity before 5 years?
Yes in three cases: you are a fixed-term employee with at least one year of service, you have worked 4 years and 240 days and your employer or a court accepts it as five years, or the payment is due to death or disablement.
Does the new Labour Code increase gratuity?
For many employees, yes. Under the 50% wage rule, wages for gratuity must be at least half of total pay, so people with a low basic salary get a larger gratuity.
Is gratuity taxable in the new tax regime?
The gratuity exemption applies in both regimes. Non-government employees get up to ₹20 lakh tax-free over their career; government employees get the full amount tax-free.
Is gratuity paid on resignation?
Yes. If you have completed five years of continuous service (or one year as a fixed-term employee), gratuity is payable when you resign.
Disclaimer: This article explains the Code on Social Security, 2020 and related tax rules as understood in October 2026. Rules for your employer may differ by contract or settlement. It is general information, not legal or tax advice – confirm your gratuity with HR or a professional.