Gratuity Calculation in India 2026: Rules, Formula and Examples

Gratuity is the one payment in Indian employment that almost everybody calculates wrongly, and the error is nearly always in the same place. It is not in the formula, which is four numbers and a division. It is in deciding what "last drawn wages" means, and that definition changed on 21 November 2025.

If your gratuity calculation still runs on basic salary alone, and your salary structure carries a special allowance or any similar unnamed component, you are probably understating the liability. In the worked example in section 5 the understatement is exactly double.

The Payment of Gratuity Act, 1972 no longer exists. It was one of eight enactments repealed when the Code on Social Security, 2020 came into force on 21 November 2025. Almost every gratuity guide online still cites the 1972 Act, including guides published this year. The substance survived largely intact, which is why the error mostly does not matter, but two things did change and both are in section 3.

Current at August 2026, under the Code on Social Security, 2020 and the Central Rules notified in 2026, with tax treatment as it stands for FY 2026-27 under the Income-tax Act, 2025. State rules under the codes are still being notified in parts. Nothing here is legal or tax advice, and gratuity disputes turn on facts about continuous service that a general article cannot assess.

What Gratuity Is, and Who Pays It

Gratuity is a statutory terminal benefit. An employer pays it to an employee who leaves after a qualifying period of service, as a lump sum, calculated by a formula the employer does not get to choose. It is not a bonus, not discretionary, and not something an employment contract can waive downwards, although a contract can be more generous than the statute.

It applies to every factory, mine, oilfield, plantation, port, railway company and shop or establishment with ten or more employees on any day in the preceding twelve months. The threshold is important and slightly counterintuitive: once an establishment crosses ten employees it remains covered even if headcount later falls below ten. Coverage does not lapse when you shrink.

Gratuity becomes payable on resignation, retirement, superannuation, death, or disablement due to accident or disease. It is payable on termination too, subject to the forfeiture rules in section 8. It is not payable while employment continues, which is the answer to the most common question about it.

Eligibility, and the Five-Year Rule

The general rule is five years of continuous service with the same employer. Continuous service means uninterrupted service, including periods of authorised leave, lay-off, strike or lockout that was not the employee's fault, and absence due to accident or illness.

Where an employee has not worked uninterruptedly, the statute deems continuous service where the employee has worked at least 240 days in a year, or 190 days in an establishment working fewer than six days a week or in an underground mine. That deeming provision is what produces the "four years and 240 days" position that circulates widely.

Be careful with that one. The proposition that four years and 240 days in the fifth year qualifies for gratuity rests on High Court decisions rather than on explicit statutory text, it has not been uniformly followed across jurisdictions, and it is not something to promise an employee or to budget against without your own legal advice. What is settled is that the 240-day rule governs whether a given year counts as continuous service; what is argued is whether it can shorten the five-year qualifying period itself. Treat it as a live question, not a rule.

The five-year requirement is waived entirely where employment ends because of death or permanent disablement. In the case of death, the amount is paid to the nominee, and the nomination is the reason Form F matters more than anybody treats it as mattering.

The change worth knowing: fixed-term employees now qualify after one year, on a pro-rata basis, rather than after five. This was one of the substantive additions in the Code on Social Security, and for companies that use fixed-term contracts at scale it converts gratuity from a liability that most people never reached into one that accrues from year one. If your workforce planning assumed fixed-term hiring avoided gratuity, that assumption expired in November 2025.

The Formula

For employees covered by the statute:

Gratuity = last drawn wages × 15 × completed years of service ÷ 26

The 26 is the assumed number of working days in a month, and the 15 is fifteen days of wages for each year served. For seasonal establishments the multiplier is seven days per season rather than fifteen.

Service is rounded to the nearest full year: six months or more rounds up, less than six months is dropped. Seven years and eight months is eight years. Seven years and five months is seven.

Take an employee whose wages at exit are ₹50,000 a month, with seven years and eight months of service, which rounds to eight.

That is the whole calculation. The difficulty is entirely in the first line.

What "Wages" Means Now, and Why It Is the Whole Article

Under the repealed 1972 Act, gratuity was calculated on last drawn basic plus dearness allowance. That was clean, and it created the incentive that shaped Indian salary structures for thirty years: keep basic low, park the rest in allowances, and the gratuity liability stays small.

The Code on Wages replaced that with a single definition of wages used across provident fund, gratuity, ESI, bonus and overtime. Wages means all remuneration, and includes basic pay, dearness allowance and retaining allowance. It excludes a defined list: house rent allowance, conveyance allowance, overtime, commission, statutory bonus, the value of house accommodation and utilities, employer provident fund contributions, gratuity itself, and retrenchment compensation.

Two rules follow, and most companies have implemented only the first.

The first is the 50 per cent rule. If the excluded components exceed half of total remuneration, the excess is added back and treated as wages. This is the widely reported change and the one that prompted a wave of restructuring in which basic was raised to 50 per cent.

The second is that the exclusion list is exhaustive, and it is the one that gets missed. Anything not on the list is wages from the outset, not merely at risk of being added back. Special allowance is not on the list. Neither is a generic other allowance, a site or shift allowance paid in cash, or a flexible benefit balance paid out as salary. Read literally, and that is how it will be read against you, those components are part of last drawn wages for gratuity.

A structure can therefore pass the 50 per cent test comfortably and still carry a much larger gratuity base than the employer has provisioned for. That is the situation in the next section.

The Worked Example That Costs Money

An employee on a monthly gross of ₹1,00,000, leaving after ten years, on a structure typical of what Indian companies were writing before November 2025.

Check the 50 per cent test first, because that is what most companies checked. Excluded components total ₹40,000 against total remuneration of ₹1,00,000, which is 40 per cent. Under half. Nothing is added back. The structure passes, and a great many payroll teams stopped there and concluded nothing needed to change.

But wages are ₹60,000, not ₹30,000, because special allowance was never excluded in the first place. Now run the gratuity both ways.

₹1,73,077 per employee of understatement, on one ten-year employee. Multiply by however many long-service employees you have and compare it against what is sitting in your gratuity provision. For most companies that ran this exercise honestly, the provision was short.

One piece of relief, with a caveat attached to it. The Ministry of Labour and Employment has said publicly that retrospective recovery of contributions for periods before the codes came into force will not be required. We have not been able to point to a notification confirming it, so treat it as a stated position rather than a settled one. On its own terms it addresses the backward-looking exposure for statutory contributions. It does not help with gratuity payable to somebody who resigns next month, because gratuity is calculated on wages last drawn, and wages last drawn are being drawn now, under the current definition.

Gratuity is also not the only place this bites. The same wage base drives provident fund and overtime, so a structure that understates one is usually understating all three at once, which we cover alongside the other habits that go wrong in common payroll compliance mistakes.

The ₹20 Lakh Ceiling, and What Happens Above It

The statutory ceiling on gratuity is ₹20 lakh for private sector employees. For central government employees it is ₹25 lakh.

Nothing stops an employer paying more, and some do, either under a contract or a long-standing policy. What changes above the ceiling is the character of the payment. The amount above ₹20 lakh is not gratuity in the statutory sense. It is ex gratia, it does not carry the statutory protections, and it is fully taxable in the employee's hands.

Take an employee with wages of ₹2,00,000 a month and 25 years of service.

An employee receiving a payment like this should know before they receive it that a third of it is taxable, because the alternative is finding out through a TDS deduction they were not expecting.

Tax Treatment

Gratuity received by an employee covered by the statute is exempt to the extent of the least of three amounts:

• the amount calculated by the statutory formula, being 15 days of last drawn wages for each completed year, divided by 26
• ₹20,00,000
• the gratuity actually received

Anything beyond that is taxable as salary in the year of receipt. Gratuity received by the nominee or legal heir on the death of an employee has its own treatment and should be checked separately, because it is taxed in the recipient's hands rather than as the employee's salary.

Note that the ₹20 lakh limit is a lifetime aggregate across employers, not per employer. An employee who received ₹14 lakh of exempt gratuity from one company has ₹6 lakh of headroom left for the rest of their career. Very few people know this and fewer declare it, which is a problem that surfaces at assessment rather than at payment.

One drafting point. The Income-tax Act, 2025 replaced the 1961 Act with effect from 1 April 2026 and renumbered its provisions, so references to the old section numbers for the gratuity exemption are no longer accurate even though the substance is unchanged. If you are citing a section number in a policy document or an F&F letter, check the current numbering rather than copying it from an older template.

Forfeiture, Which Is Narrower Than Employers Think

Gratuity can be forfeited, but only in defined circumstances and only to a defined extent.

• Where the employee's services were terminated for wilful omission or negligence causing damage or loss to the employer's property, forfeiture is limited to the extent of the damage or loss. Not the whole gratuity, only the loss.
• Where services were terminated for riotous or disorderly conduct, or any act of violence, gratuity may be forfeited wholly or partially.
• Where services were terminated for an offence involving moral turpitude committed in the course of employment, the same applies.

What forfeiture does not cover is the situation employers most often try to use it for: an employee who resigned without serving notice, or who left on bad terms, or who joined a competitor. Withholding gratuity as leverage in a notice period dispute is not one of the grounds, and it is a common enough practice that it is worth stating plainly. Nor is gratuity a set-off against amounts the employee allegedly owes, absent a proper adjudication.

Forfeiture also requires that the termination was actually for the misconduct in question, which means a disciplinary process that produced that finding. Deciding after the resignation that the conduct was disorderly does not qualify.

Timelines, Interest, and the Process

Gratuity is payable within 30 days of becoming due. From day 31, simple interest runs on the unpaid amount at 10 per cent per annum. The interest is not discretionary and it is not conditional on the employee asking for it.

The obligation to pay is not conditional on the employee applying. This is the procedural point employers get wrong most often: the employer is required to determine the amount and pay it, whether or not a claim has been made. An employee application, made in Form I, is a mechanism for the employee to press the claim, not a precondition for the employer's duty.

The sequence in practice:

• Employment ends. Gratuity becomes due.
• The employer determines the amount and gives notice of it to the employee or nominee, and to the controlling authority.
• Payment within 30 days, usually as part of full and final settlement.
• If it is not paid, the employee may apply to the controlling authority, who can direct payment with interest.

Nomination is the piece that fails quietly. Form F should be collected at the point of joining and refreshed when an employee marries or has a child, because a nomination naming a parent when a spouse exists is the kind of thing that turns a straightforward death claim into a dispute between family members that the employer gets to sit in the middle of.

If You Are the Employer: Provisioning

Gratuity is an unfunded liability unless you deliberately fund it. Two things are worth separating.

The accrual in CTC. Most companies book 4.81 per cent of basic as the monthly gratuity accrual. The figure comes from the formula: fifteen days divided by 26 days divided by 12 months is 4.81 per cent. It is a reasonable approximation for an offer letter. It is not a valuation, and if your wage base is now larger than basic, as section 5 showed, then 4.81 per cent of basic is understating the accrual.

The balance sheet liability. Companies applying the accounting standards on employee benefits need an actuarial valuation, which accounts for salary growth, attrition and discount rates rather than a flat percentage. If your last valuation was run on a wage definition that predates November 2025, the assumptions need revisiting rather than the arithmetic.

Funding options are a group gratuity scheme with an insurer or an approved gratuity trust. Both convert a lumpy, unpredictable outflow into a regular contribution, and both have their own tax treatment. Which one suits you is a question for your auditors, not for an article.

The operational point that sits underneath all of it: gratuity is calculated on last drawn wages and on completed years of continuous service, so its accuracy depends entirely on your date-of-joining records and your salary revision history being correct going back a decade. Companies that have changed payroll systems twice in that period often cannot reconstruct either. Our payroll management system keeps the wage history and the service record against the same employee record, which matters far more at exit than it does during employment.

Questions People Ask

Do I get gratuity if I leave before five years?

Generally no, unless you are a fixed-term employee, in which case you qualify after one year on a pro-rata basis. The five-year requirement is also waived where employment ends because of death or permanent disablement. There is a widely repeated position that four years and 240 days qualifies, which rests on High Court decisions rather than on the statute itself and has not been followed uniformly. Do not rely on it without your own advice.

Is gratuity calculated on basic salary or on gross salary?

On neither, exactly. It is calculated on wages as defined by the Code on Wages, which is basic plus dearness allowance plus every component that is not on the statutory exclusion list. HRA, conveyance, overtime, commission and statutory bonus are excluded. Special allowance and similar unnamed components are not excluded, so they form part of the base. For most Indian salary structures this produces a figure between basic and gross, and closer to gross than employers expect.

What is the maximum gratuity payable?

The statutory ceiling is ₹20 lakh for private sector employees and ₹25 lakh for central government employees. An employer may pay more under contract or policy, but the excess is not gratuity in the statutory sense: it is ex gratia and it is fully taxable. The ₹20 lakh tax exemption is also a lifetime aggregate across all employers, not a fresh limit at each job.

How many days of salary is gratuity per year?

Fifteen days of wages for each completed year of service, calculated using a 26-day month rather than a 30-day month. That divisor is why the effective rate works out at about 4.81 per cent of monthly wages per year served. Seasonal establishments use seven days per season instead of fifteen.

What happens if my employer does not pay gratuity within 30 days?

Simple interest at 10 per cent per annum runs on the unpaid amount from day 31, and you can apply to the controlling authority under the Code, who can direct payment. The employer's duty to determine and pay the amount does not depend on you applying first. Keep your appointment letter, your last three payslips and your relieving letter, because the dispute is usually about the wage base or the joining date rather than about entitlement.

Can an employer withhold gratuity if I did not serve my notice period?

Forfeiture is available only on specific grounds: damage or loss caused by the employee's wilful negligence, limited to the extent of that loss; riotous or disorderly conduct or violence; and offences involving moral turpitude committed in the course of employment. Not serving notice is not among them. Adjusting gratuity against notice pay is a common practice and a contested one, and it is worth challenging.

Is the Payment of Gratuity Act 1972 still in force?

No. It was repealed on 21 November 2025 when the Code on Social Security, 2020 came into force, along with seven other enactments. Gratuity is now governed by the Code and the rules under it. The formula, the five-year qualifying period and the ₹20 lakh ceiling carried over largely unchanged, which is why most published guidance is still substantively right while citing a repealed statute. The two real changes are fixed-term employees qualifying at one year, and the wage base.

Where This Leaves You

For employees: the formula is simple and the base is not. Before you accept a gratuity figure at exit, check what wage the employer used. If they used basic alone and your structure has a special allowance, the figure is arguably low, and the arithmetic to show it is one multiplication.

For employers: the exposure is not in the formula either. It is in a wage definition that changed, a fixed-term population that now accrues from year one, and a provision that was probably calculated at 4.81 per cent of a basic salary that is no longer the whole base. None of that produces an immediate cash problem. It produces a full and final settlement, eighteen months from now, that is larger than anybody budgeted.

Run your own numbers in our free gratuity calculator, and use the wage base from section 4 rather than bare basic when you do. If you need the whole exit payment rather than one line of it, the payslip generator covers the settlement side, and if the underlying problem is that your service records and salary history live in three different places, that is what our payroll management system is built to fix. Book a free demo and bring a full and final settlement you found difficult.

The rest of this set: what the wage definition did to salary design in CTC breakup, component by component, the monthly tax in TDS on salary, old regime versus new, and the document all of it has to appear on in payslip format and mandatory components. For the wider statutory picture, see our labour law compliance checklist.