How to calculate gratuity in India

How is gratuity calculated in India?

Divide your last drawn monthly wages by 26, multiply by 15, and multiply by your completed years of service. Section 53(2) of the Code on Social Security 2020 sets the rate at 15 days’ wages per completed year, with any part-year over six months counting as a full year.

Written out: gratuity = wages ÷ 26 × 15 × years. Three details decide most disputes. “Wages” has a legal meaning, covered in the next section. “Years” rounds up only when the part-year exceeds six months: 10 years 7 months counts as 11, and 10 years 6 months counts as 10. And the total cannot exceed ₹20,00,000.

Two variations. Seasonal establishments pay 7 days’ wages per season instead. Piece-rated workers use the average of their total wages over the preceding three months as the daily wage.

What does 15/26 mean in the gratuity formula?

The 26 is a working month: the law assumes 26 paid days, not 30. The 15 is roughly half of that month. So 15/26 is 57.69% of one month’s wages for every year you worked, or about 4.81% of your annual wages.

What it adds up to surprises people. Five years of service earns 2.88 months of wages. Ten years earns 5.77 months. Twenty years earns just under a full year’s wages. Gratuity is not a token: for long-serving people it is the largest single payment they will ever receive from an employer.

Which parts of my salary count for gratuity?

Basic pay, dearness allowance and retaining allowance count. HRA, conveyance, overtime, commission, statutory bonus, employer PF and the value of amenities do not, unless together they exceed half your total remuneration, in which case the excess is added back. In practice, your gratuity base is the higher of your basic + DA, or half your total pay.

This is the change that matters. The Code’s definition of wages, section 2(88), lists eleven excluded items, then adds a rule with teeth: if the excluded items under heads (a) to (i) exceed one-half of all remuneration, the excess is deemed to be wages. Work the algebra and it lands in one line: the gratuity base cannot fall below 50% of total remuneration. Salary structures built on a thin basic and heavy allowances stopped working for gratuity on 21 November 2025.

The Ministry of Labour’s own FAQs (16 March 2026) confirm the edges: only section 2(88) components count for gratuity, annual performance incentives are not wages, and gratuity itself and other retirement benefits stay out of the 50% test.

How many years do I need to get gratuity?

Five years of continuous service, in most cases. One year if you are on a written fixed-term contract. Three years for working journalists. No minimum at all if the employment ends because of death or disablement due to accident or disease.

The five-year clock is more forgiving than it looks. “Continuous service” (s.54) counts a year as 240 worked days (190 in mines and establishments working under six days a week), and counts leave with full wages, lay-off under an agreement, absence from a work injury, and up to 26 weeks of maternity leave as days worked.

Some people are outside the gate. Apprentices engaged under the Apprentices Act 1961 are not “employees”, though a “trainee” hired outside that Act is, and does accrue gratuity. Gig and platform workers sit in a separate chapter of the Code with life, disability, health and pension benefits; gratuity is not among them. And contract labour claims from the contractor, on the five-year rule, not the one-year fixed-term rule.

Does the law apply to your employer at all? Yes for factories, mines, oilfields, plantations, ports and railway companies of any size, and for shops and establishments with 10 or more employees on any day in the preceding twelve months. Below ten, there is no statutory gratuity; anything paid is the employer’s own policy or contract.

Can I get gratuity if I resign? Yes. Resignation is a listed exit (s.53(1)(b)). The only test is the service clock: five years for permanent staff, one year on a written fixed-term contract, three for working journalists. Resigning does not forfeit anything.

Do the notice period and probation count? A notice period you actually serve counts, service runs to your last working day. Probation counts too; the law does not distinguish probationers from confirmed staff. What does not count is notice you were paid for in lieu but never served.

Is 4 years 7 months enough for gratuity?

On the plain words, no: the Code requires five years. But 4 years and 240 worked days is arguable, and in Tamil Nadu and Kerala the High Courts have held it is enough. Elsewhere it is a strong argument rather than a settled entitlement. The Supreme Court has not ruled.

The argument runs through the deeming provision: if 240 worked days count as a year, then 240 days into the fifth year completes it. The Madras High Court accepted this in Mettur Beardsell (1998); the Kerala High Court in Sreeja B. (2015). Controlling authorities in those two states are bound. A claim elsewhere can cite both, persuasively, not conclusively. Be wary of anything that says “4 years 240 days is now the rule”: no court has yet applied the Code’s s.54 to the question.

Is gratuity taxable in India?

Statutory gratuity is normally fully tax-free, because the exemption is calculated on the same formula that produces the entitlement. Anything your employer pays above the statutory amount is taxable. Government employees are exempt without limit. The cap for everyone else is ₹20 lakh, across your lifetime, not per job.

One correction to most of what you will read elsewhere: from 1 April 2026 the exemption no longer lives in “section 10(10)”. The Income-tax Act 2025 moved it into the salary rules themselves, the section 19(1) Table, serial numbers 3 to 6, with Schedule III (serial 38) covering gratuity paid to a family on an employee’s death, which is exempt in the family’s hands.

Two consequences worth knowing. The not-covered formula uses one-half instead of 15/26, so it always comes out 13.3% lower: an employee of a nine-person firm with ₹50,000 average salary and ten completed years gets ₹2,50,000 of exemption against ₹2,88,462 for the identical person in a ten-person firm. And where gratuity lands in one year and pushes you into a higher slab, section 157 gives relief for amounts received in arrears, claimed on Form 39.

Is gratuity still tax-free under the new tax regime? Yes. The exemption sits inside the salary computation itself, not among the deductions the new regime removed. Your choice of regime does not touch it. And ignore the “₹5 lakh gratuity exemption circular” being shared around: no such CBDT circular could be found, and the ₹20 lakh position stands.

When must my employer pay, and what if they don’t?

Within thirty days of gratuity becoming payable (section 56(3)). Simple interest runs on delay under section 56(4). Failing to pay gratuity is an offence under section 133 of the Code: up to one year’s imprisonment, a fine up to ₹50,000, or both.

The route, if it goes wrong: apply in writing (Form IV under the 2026 Central Rules, ordinarily within 30 days, though a late application does not kill the claim). The employer must answer within 15 days (Form V). A dispute goes to the competent authority, and the employer must deposit the amount it admits while the dispute runs. Appeals go up within 60 days. On interest: the rate notified before the Code was 10% a year simple, and the courts have enforced it; a fresh rate under the Code is awaited, so take the current figure from the authority handling your case.

Will gratuity come in my full and final settlement? Often, but it is not an FnF item the employer may hold back against notice-period recoveries or a pending clearance. It is a separate statutory payment on its own 30-day clock, and it is payable whether or not you apply.

Can my employer refuse to pay gratuity?

Only in narrow cases, and never silently. Where your proven misconduct caused the employer damage or loss, gratuity is forfeited to the extent of that loss. For riotous or violent conduct, or an offence involving moral turpitude at work, it can be forfeited wholly or partly, after a fair hearing. Refusal without a forfeiture order is simply non-payment.

The Supreme Court policed both gates recently. In February 2025 (Western Coal Fields v. Fulzele) it held a criminal conviction is not required for moral-turpitude forfeiture, a fair disciplinary finding can do, but the discretion must be exercised proportionately. In July 2026 (Prabhat Kumar Singh v. Accu Pack Engineering) it rejected a claimed ₹50 lakh loss backed by no audit report or calculation: the loss must be proved by independent evidence, and forfeiture is limited to what is proved.

Is gratuity part of my CTC, and do I lose it if I leave before five years? Many offer letters count a gratuity accrual inside CTC. Showing it in CTC does not create a right to it before the law does: leave before the threshold and it is not payable, whatever the CTC sheet said. It also does not work the other way; an employer cannot deduct gratuity from monthly pay and call it recovered. If yours was shown in CTC, treat it as the employer pre-funding a legal obligation, not as deferred salary you can encash early.

How is gratuity different from PF?

PF is a savings account you and your employer fill every month, and it follows you from job to job. Gratuity is a lump sum the employer alone owes you for long service, paid only when you leave, and the clock restarts at zero with every new employer.

Does gratuity transfer when I change jobs? No. Leave at four years, join elsewhere, and both clocks show zero: nothing carries over, and the old employer owes nothing. One exception is a transfer within the same employer or to its successor on a business transfer, where service usually continues. The ₹20 lakh tax-free limit, though, is a lifetime total across all employers.

Who can I nominate? File the nomination after one year of service, and keep it current. Where you have a family, the rules require the nomination to be in favour of family members; a nomination to anyone else while family exists does not hold. Marriage is the moment people forget: review the form after it.

What are past service gratuity and future service gratuity?

Past service gratuity is what your people have already earned: every year already worked, valued today, sitting on your balance sheet whether funded or not. Future service gratuity is what they will earn from today onward, arriving one year at a time. An insurer or actuary prices the two separately, and funds them differently.

Think of a company eleven years old that has never set a rupee aside. The whole eleven-year backlog is past service: it is funded with one initial contribution, historically allowed in up to five annual instalments under a 1969 CBDT concession; ask your tax adviser to confirm its position under the 2025 Act. Everything from here on is future service: funded by an ordinary annual contribution that keeps pace with each year’s fresh accrual.

The distinction that trips up almost everyone: past service liability and past service cost are different things. The liability is a funding idea, the accrued obligation on the day you start a fund. Starting a fund creates no expense; it creates a plan asset. Past service cost is an accounting idea (Ind AS 19, para 102): the change in the obligation caused by amending the plan. Starting a fund is not a plan amendment. Changing the benefit formula is, and that is exactly what the Labour Codes did on 21 November 2025.

That is why the increase hit the P&L at once rather than being spread. ICAI’s Accounting Standards Board said so in December 2025: a plan amendment, recognised immediately under Ind AS 19 para 103, first landing in the quarter ended 31 December 2025. The Institute of Actuaries of India (27 January 2026) went further and shut the side door: the increase is not an actuarial loss to be parked in other comprehensive income, even where salaries were restructured to comply. Under AS 15, only the vested part hits at once; the unvested part spreads to vesting.

What funding changes: the tax timing (a provision is not deductible under s.29(2)(a) of the 2025 Act; a sum actually paid to an approved fund under an irrevocable trust is, under s.29(1)(c)); the fund’s own earnings, which build up tax-free; and the cash profile, a lumpy exit-driven outflow becomes a planned contribution.

What funding does not change: the obligation, which stays yours (if premiums or contributions stop, the employer owes the gratuity forthwith, s.57(5)); the size of the obligation, which funding offsets but never reduces; and the accounting character, an insured plan stays a defined benefit plan unless the insurer takes over the obligation itself, which a group gratuity accumulation scheme does not. One structural point nobody says out loud: the obligation is discounted at government bond yields while the fund earns the insurer’s declared rate, so even a fully funded scheme drifts into surplus or deficit from that spread alone. Funding removes cash-timing risk, not balance-sheet movement.

The mechanics, briefly. An irrevocable trust with at least two resident trustees; approval applied for online in Form 188; not a rupee may ever return to the employer (Rule 324). The trust’s money may be placed in a group gratuity scheme with an insurer, expressly permitted (Rule 318), and the simplest compliant route. IRDAI requires such schemes to carry life cover with an explicit mortality charge, and requires the trustees to confirm the funding is needed per the accounting standard: a gratuity policy cannot be used as an investment parking spot.

Recognising a liability and funding it are two different decisions.

Does gratuity law differ by state?

The entitlement (formula, five years, ceiling) is national and identical everywhere. What differs by state: which rulebook supplies your forms, one contested insurance obligation in three southern states, two surviving state statutes in Kerala and Assam, and one judicial split on the 4-years-240-days question.

Before the table, one test that does most of the work. If your company has branches in more than one state, your “appropriate Government” is the Centre (s.2(3)): the Central Rules 2026 govern your gratuity paperwork everywhere, and on the published professional reading the state insurance rules below never applied to you at all. A single-state company, including a single-state subsidiary of a multi-state group, follows its state.

One national deadline set worth pinning to the HR wall, from the Social Security (Central) Rules 2026:

What changed in India’s gratuity rules in 2025–26?

Three dates. 21 November 2025: the Payment of Gratuity Act 1972 was repealed and gratuity moved into the Code on Social Security 2020, same formula, wider wage base, and one-year eligibility for fixed-term staff. 8 May 2026: new Central Rules replaced the 1972 forms. 1 April 2026: the Income-tax Act 2025 renumbered the exemption.

What did not change matters as much: the 15/26 formula, the five-year rule for permanent staff, and the ₹20 lakh ceiling all carried over. The quiet change is that the rate, the ceiling and even compulsory insurance are now switches the government can flip by notification, without amending the law. When one flips, this page changes with it; the date at the top tells you when it was last checked.

ग्रेच्युटी क्या होती है?

ग्रेच्युटी वह रक़म है जो कंपनी लंबी सेवा के बदले देती है, नौकरी छोड़ने, रिटायर होने, या मृत्यु की स्थिति में परिवार को। हिसाब आसान है: आख़िरी महीने की मज़दूरी ÷ 26 × 15 × सेवा के पूरे साल। ज़्यादातर कर्मचारियों के लिए पाँच साल की सेवा ज़रूरी है; लिखित फिक्स्ड-टर्म कॉन्ट्रैक्ट पर एक साल काफ़ी है। ऊपर दिया कैलकुलेटर हिंदी में भी यही हिसाब करता है, अपनी सैलरी और तारीख़ें डालिए।