Your employment
Length of service
Last drawn monthly pay
Gratuity estimate
Step by step
How gratuity is calculated
For employers covered by the law (most firms with 10 or more employees), gratuity is 15 days of last drawn wages for every completed year of service, with a month counted as 26 working days:
Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service
A part year of more than six months is rounded up to a full year, so 7 years and 7 months counts as 8 years, while 7 years and 5 months counts as 7. Seasonal establishments use 7 days instead of 15. If your employer is not covered, the income tax rules use half a month's average pay (average of the last 10 months) for each completed year instead.
What changed with the new Labour Codes
The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972 from 21 November 2025. Three changes matter for your gratuity:
- 50% wages rule: "wages" means basic pay, dearness allowance and retaining allowance. If the excluded allowances (HRA, special allowance and so on) are more than half of your total pay, the excess is added back, so wages are never less than 50% of your remuneration. For many CTC structures with a low basic, this raises gratuity.
- Fixed-term employees: staff on a contract with an end date are eligible after 1 year of service, paid pro rata, instead of 5 years.
- Permanent employees: the 5-year continuous service rule stays. It does not apply on death or disablement.
The Labour Ministry's FAQs say the revised wage definition applies to gratuity from 21 November 2025 and not retrospectively. The upper limit remains ₹20 lakh.
Worked examples
| Case | Wages used | Years counted | Gratuity |
|---|---|---|---|
| Basic + DA ₹50,000, 10 years | ₹50,000 | 10 | ₹2,88,462 |
| Basic ₹40,000, other allowances ₹60,000, 7 years | ₹50,000 (50% of ₹1,00,000) | 7 | ₹2,01,923 |
| Basic + DA ₹30,000, 6 years 8 months | ₹30,000 | 7 | ₹1,21,154 |
| Fixed-term, basic ₹25,000, 1 year 2 months | ₹25,000 | 1 | ₹14,423 |
Is gratuity taxable?
Government employees get gratuity fully tax-free. For private-sector employees covered by the law, the tax-free amount is the least of the gratuity actually received, the 15/26 formula amount and ₹20 lakh (section 10(10)(ii) of the Income-tax Act, 1961). For employers not covered, it is the least of the amount received, half a month's average pay × completed years and ₹20 lakh. Anything above that is taxed as salary at your slab rate, which you can check in the income tax calculator.
Planning what to do with the money? Compare a fixed deposit, the PPF or a SIP.
Frequently asked questions
How is gratuity calculated?
Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service. Wages are basic pay plus dearness allowance (and retaining allowance). A part year of more than six months counts as a full year. For example, ₹50,000 wages for 10 years gives ₹2,88,462.
What is the 50% wages rule for gratuity?
Under the Labour Codes in force from 21 November 2025, if allowances outside basic, DA and retaining allowance are more than 50% of your total pay, the excess is added to wages. So gratuity is worked out on at least half of your total monthly remuneration.
Can I get gratuity after 1 year?
Yes, if you are a fixed-term employee, meaning your contract has an end date. From 21 November 2025 fixed-term employees get pro-rata gratuity after 1 year of service. Permanent employees still need 5 years of continuous service, except on death or disablement.
Is 4 years 8 months counted as 5 years for gratuity?
The law asks for 5 years of continuous service. Some High Court rulings have counted 4 years plus 240 working days in the fifth year as 5 years, but employers differ, so confirm with your HR. The calculator flags this case as borderline.
What is the maximum gratuity limit?
The legal ceiling is ₹20 lakh. Employers may pay more under their own policy, but any amount above the tax-free limit is taxable as salary.
How much gratuity is tax-free?
For covered private-sector employees, the least of the gratuity received, the 15/26 formula amount and ₹20 lakh is exempt. Government employees' gratuity is fully exempt. The rest is taxed at your slab rate.
Why does the formula divide by 26?
The law treats a month as 26 working days (30 days minus 4 Sundays). Fifteen days' wages for each year is therefore monthly wages × 15 ÷ 26.
When must the employer pay gratuity?
Gratuity becomes payable when employment ends and should be paid within 30 days of it becoming payable. Late payment attracts simple interest at the rate notified by the government.