How Is Gratuity Calculated? Formula and Eligibility (2026)

Gratuity = last drawn monthly wages × 15 ÷ 26 × completed years of service. "Wages" means basic pay plus dearness allowance, and the 15/26 stands for fifteen days' wages for each year, counting a month as 26 working days. A permanent employee qualifies after five years of continuous service; under the Code on Social Security, a fixed-term employee qualifies after one year.

Gratuity is now governed by the Code on Social Security, 2020, which came into force on 21 November 2025 and replaced the Payment of Gratuity Act, 1972. The formula carried over. What changed is who qualifies early, and what counts as "wages".

A worked example

An employee leaves after 7 years and 8 months. Their last drawn basic plus DA is ₹40,000 a month.

• Years of service: 7 years and 8 months. A part year of more than six months counts as a full year, so this is 8 years.
• Gratuity = ₹40,000 × 15 ÷ 26 × 8 = ₹1,84,615.

Had they left at 7 years and 5 months, the five months would not count, and the figure would be calculated on 7 years.

Who qualifies

• Permanent employees after five years of continuous service, on resignation, retirement or superannuation.
• Fixed-term employees on a written fixed-term contract: pro-rata, after one year. This is the biggest practical change in the Code for businesses that hire on annual contracts.
• Death or disablement: the five-year condition does not apply. Gratuity is payable for the service completed, to the employee or their nominee.

What counts as "wages" now

The labour codes use one definition of wages, under which allowances excluded from wages are limited to half of total remuneration, with any excess added back. If an employee's basic was a small part of their salary, the wage figure that goes into the gratuity formula may now be higher than the basic on their payslip. The Labour Ministry's FAQs indicate that gratuity is paid on the wages last drawn at the time the employee leaves, on or after 21 November 2025; confirm how earlier service is treated for your case with your CA.

Is there a ceiling?

The Code lets the Central Government notify a maximum amount. Separately, the income-tax exemption for gratuity received by private-sector employees has an upper limit, widely quoted as ₹20 lakh. These are two different limits, and a payment can be above the tax-free amount and still be legally due. Check the current notified figures before you promise anyone a number.

When it must be paid

Gratuity is due when employment ends, and it should be paid within 30 days of becoming payable; delay attracts interest. An employer cannot forfeit it except on the narrow grounds the law allows, such as termination for specified misconduct that caused loss.

Who this does not apply to

Establishments below the coverage threshold under the Code are not obliged to pay statutory gratuity, though many do by contract. Consultants and freelancers paid on invoice are not employees and do not earn gratuity.

A test you can run this week

List every employee who has crossed four and a half years of service, and every fixed-term employee past one year. Multiply each one's current basic plus DA by 15/26 and their completed years. The total is a liability your business already owes, whether or not it appears in your books; if it is not provided for, the first senior resignation will arrive as a cash surprise.

Grovia keeps each employee's joining date, basic pay and monthly payroll records in one place, which makes that list quick to build. It does not calculate gratuity for you; use the formula above, and have your CA confirm the wage figure.

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Figures checked on 27 October 2026. Tax and labour rules change; confirm the current position with your CA before you act on it.

Frequently Asked Questions

What is the formula for gratuity?

Last drawn monthly wages, meaning basic plus DA, multiplied by 15, divided by 26, multiplied by completed years of service.

Is gratuity payable before five years?

For permanent employees, generally not, except on death or disablement. Fixed-term employees qualify on a pro-rata basis after one year under the Code on Social Security.

Does 4 years and 8 months count as 5 years for gratuity?

The rule that a part year of more than six months counts as a full year is used to calculate the amount once someone is eligible. Whether it also completes the five-year eligibility period has been argued in the courts; check with your CA before relying on it.

Is gratuity taxable?

For private-sector employees it is exempt up to a limit under income-tax law, widely quoted as ₹20 lakh. Anything above that is taxable as salary.

How soon must an employer pay gratuity?

Within 30 days of it becoming payable. Late payment attracts simple interest.