How gratuity is calculated: formula, eligibility and a worked example

Gratuity is last drawn monthly wages × 15 ÷ 26 × completed years of service. Since 21 November 2025 it is governed by the Code on Social Security, 2020, under which wages are basic plus dearness allowance but at least 50% of total remuneration. It is payable after five years of continuous service (one year for fixed-term employees), a part-year of more than six months counts as a full year, and the statutory maximum is ₹20 lakh.

Who is eligible

Gratuity was long governed by the Payment of Gratuity Act, 1972. The four labour codes came into force on 21 November 2025, and the Code on Social Security, 2020 now carries these rules. A permanent employee becomes eligible after five years of continuous service when they resign, retire or are terminated, and the five-year condition does not apply on death or disablement. Under the Code, fixed-term employees become eligible after one year of service under their contract, on a pro-rata basis.

The formula

Gratuity = last drawn monthly wages × 15 ÷ 26 × number of completed years of service. The 26 reflects the working days in a month, and 15 is the days of wages awarded per completed year. The formula itself did not change with the Code.

What counts as wages now

Under the Code, wages are basic pay, dearness allowance and retaining allowance. Allowances excluded from wages cannot add up to more than 50% of total remuneration; if they do, the excess is added back. In practice wages for gratuity cannot be less than half of total remuneration, so a salary structure with a small basic and large allowances now produces a higher gratuity than it did under basic plus dearness allowance alone. The rule applies from 21 November 2025.

Part years

Service is counted in completed years. A fraction of more than six months is rounded up to the next year; six months or less is ignored. Someone with 5 years and 8 months is paid for 6 years; someone with 5 years and 3 months is paid for 5.

Worked example

An employee’s last drawn wages are ₹52,000 a month (already at least half of their total remuneration) and they leave after 8 years of service.

  1. ₹52,000 × 15 ÷ 26 = ₹30,000 per completed year.
  2. ₹30,000 × 8 years = ₹2,40,000 gratuity.

The cap and tax

The statutory ceiling on gratuity is ₹20 lakh. For employees covered by the Act, gratuity received is exempt from income tax up to the lowest of the actual amount, the formula amount and ₹20 lakh; amounts above that are taxable as salary, so the final settlement has to account for TDS.

Where payroll systems go wrong

  • Using basic alone when allowances exceed half of remuneration, so the 50% wages rule is missed.
  • Using gross salary or CTC as wages.
  • Rounding every part-year up, or never rounding up.
  • Paying gratuity before the five-year mark outside death or disablement, without noting it is ex-gratia.
  • Forgetting to include gratuity in the final settlement’s TDS calculation.

Statutory rates, ceilings and due dates are revised by government notification. The figures here were accurate at the time of writing — confirm against the official source (EPFO, ESIC, your state labour department or the Income Tax Department) before relying on them for a filing.

Frequently asked questions

What is the gratuity formula in India?

Last drawn monthly wages × 15 ÷ 26 × completed years of service. Wages are basic plus dearness allowance, and at least 50% of total remuneration under the Code on Social Security, 2020.

Is gratuity payable after 4 years and 8 months?

For permanent employees the minimum is five years of continuous service, except on death or disablement. Fixed-term employees qualify after one year under the Code. Some employers pay earlier by policy, which is then not a statutory entitlement.

What is the maximum gratuity amount?

The statutory ceiling is ₹20 lakh. Employers may pay more by policy, but the excess is not covered by the Act’s tax exemption.

Does gratuity use CTC or gross salary?

Neither directly. It uses wages: basic plus dearness allowance, lifted to at least 50% of total remuneration under the Code on Social Security, 2020.