Gratuity in India: eligibility, formula, tax and worked examples

Gratuity is a lump-sum payment for long service and one of the larger numbers in any full and final settlement. Since 21 November 2025 it is governed by Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. The 15/26 formula and the ₹20 lakh ceiling carried over; what changed is the wage base and the rule for fixed-term employees.

Who must pay gratuity

The Code applies gratuity to every factory, mine, oilfield, plantation, port, railway company, and every shop or establishment in which 10 or more employees are employed, or were employed on any day of the preceding twelve months. Once it applies, it continues to apply even if headcount later falls below 10.

Who is eligible

Situation	Service needed
Regular employee leaving on superannuation, retirement, resignation or termination	5 years of continuous service
Death or disablement due to accident or disease	No minimum
Fixed-term employee whose contract ends	1 year, paid pro rata for the service

The one-year rule for fixed-term employees is the change HR teams most often miss. Under the 1972 Act a fixed-term employee with less than five years got nothing; under the Code they qualify after one year. Our guide to fixed-term employment under the Labour Codes covers the contract side.

"Continuous service" includes authorised leave, sickness, accident and lay-off periods, so it is not the same as days present.

The formula

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

• Wages now means wages as defined in the Code: broadly basic pay, dearness allowance and retaining allowance, with excluded allowances above 50% of total remuneration added back. A low-basic structure can therefore produce a higher gratuity than before. See the 50% wage rule.
• 26 is the number of working days in a month; 15 is the days of wages per year. Seasonal establishments use 7 days per season.
• Part years: a final part year of more than six months counts as a full year.

Worked examples

A regular employee with last drawn wages of ₹60,000 and 8 years of service:

Step	Calculation	Value
Formula	15 × 60,000 × 8 ÷ 26	₹2,76,923

The same wages with 12 years and 7 months of service round up to 13 years: 15 × 60,000 × 13 ÷ 26 = ₹4,50,000.

A fixed-term employee on wages of ₹30,000 whose 14-month contract ends: 15 × 30,000 × 1 ÷ 26 = ₹17,308. Whether the two months beyond the first year count on a pro-rata basis depends on the rules that apply to you, so confirm before settling.

For a quick figure, use the gratuity calculator.

The ceiling and the payment deadline

The ceiling is the amount the Central Government notifies; it is ₹20,00,000 as last notified. An employer may pay more under a contract or scheme, but anything above the tax exemption is taxable.

Gratuity must be paid within 30 days of becoming payable. A late payment carries simple interest at the rate the government notifies.

Forfeiture

Gratuity can be forfeited, wholly or partly, only on the grounds the Code lists: termination for wilful omission or negligence causing damage (to the extent of the damage), and termination for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment. A domestic enquiry and a written order are the minimum.

How gratuity is taxed

From tax year 2026-27 the exemption sits in section 19(1) of the Income-tax Act, 2025 (formerly section 10(10) of the 1961 Act). For employees covered by the Code, the exempt amount is the least of:

1. The gratuity actually received.
2. ₹20,00,000 (a lifetime limit across employers).
3. The formula amount.

The excess is salary income and taxed through TDS in the final settlement. The exemption is available under both tax regimes.

Common mistakes

• Paying fixed-term employees nothing because they have less than five years.
• Using basic pay alone after the Code's wage definition adds allowances back.
• Ignoring the six-month rounding on the final part year.
• Paying after 30 days without interest.
• Citing the repealed 1972 Act in letters and policies.

FAQs

Is gratuity payable if someone resigns before five years? Not for a regular employee, unless employment ends by death or disablement. A fixed-term employee qualifies after one year.

Does notice period count as service? Yes. Service runs to the last working day.

Is gratuity paid on gross salary? No. It is paid on wages as the Code defines them, which can be more than basic plus DA where allowances exceed 50% of total remuneration.

Do we still need the Payment of Gratuity Act forms? The Ministry of Labour has said rules under the old Acts continue during the transition to the extent they are consistent with the Codes. Check the forms your state has notified under the Code.

Key takeaways

• Gratuity is now under the Code on Social Security, 2020.
• Five years for regular employees, one year for fixed-term employees, none on death or disablement.
• 15 × wages × years ÷ 26, on the Code's wage definition, capped at ₹20 lakh as last notified.
• Pay within 30 days; the exemption is section 19(1) of the Income-tax Act, 2025.

NeevHR computes gratuity in the full and final settlement on the configured wage basis, applies the fixed-term rule, cites the section in force for the tax year, and shows the amount in words on the settlement letter. See full and final settlement.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 03 Nov 2026.