What is Gratuity?
Gratuity is a lump-sum benefit paid to an employee on leaving after at least five years of continuous service, calculated as 15/26 of last drawn wages for each completed year.
Definition
Gratuity rewards long service. It was governed by the Payment of Gratuity Act, 1972 and is now part of the Code on Social Security, 2020, which the Government brought into force from 21 November 2025. The Code also extends gratuity to fixed-term employees after one year of service. State and central rules under the Code are still being finalised in places, so confirm the rule that applies to your establishment.
How it works
- Formula for covered employees: 15 × last drawn wages (basic plus DA) × completed years of service ÷ 26.
- A part year of more than six months is usually rounded up to a full year.
- The five-year condition does not apply on death or disablement.
- The statutory ceiling is ₹20 lakh, which is also the income-tax exemption limit for most private-sector employees.
Why HR and payroll teams care
Gratuity is a real liability that grows every year. It must be paid within 30 days of becoming payable, and it feeds full and final settlement.
Example
Last drawn basic + DA of ₹40,000, 7 years 8 months of service
- Service rounded to 8 years (the 8 months exceed six months).
- Gratuity = 15 × ₹40,000 × 8 ÷ 26 = ₹1,84,615
Gratuity in NeevHR
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