What is gratuity?
Gratuity is a lump-sum payment an employer makes to an employee as a reward for long service, usually when they resign, retire or leave the job. It is governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act from 21 November 2025. Many employers show a provision for gratuity in your CTC, but you only receive it when you leave.
Gratuity formula
- Last drawn wages = monthly basic pay + dearness allowance
- 15 = fifteen days' wages for each year
- 26 = working days in a month
- Years of service: a final part-year of more than 6 months counts as a full year
Worked examples
| Last monthly wages | Service | Gratuity |
|---|---|---|
| ₹50,000 | 10 years | ₹2,88,462 |
| ₹50,000 | 10 years 7 months (counted as 11) | ₹3,17,308 |
| ₹80,000 | 20 years | ₹9,23,077 |
| ₹2,00,000 | 25 years | ₹28,84,615 (₹20,00,000 tax-free) |
Eligibility
- Permanent employees: at least 5 years of continuous service.
- Fixed-term employees: at least 1 year of service, under the new labour codes.
- Death or disability: gratuity is payable regardless of length of service.
- The employer must pay within 30 days of it becoming due.
Tax on gratuity
For private-sector employees, gratuity is tax-free up to ₹20,00,000 in a lifetime, across all employers; anything more is added to your income and taxed at your slab rate. Gratuity paid to central and state government employees is fully exempt.
See how gratuity shows up in your pay package with the salary calculator, and plan your retirement savings with the EPF calculator and income tax calculator.
Frequently asked questions
How is gratuity calculated?
For employers covered by the gratuity law: Gratuity = Last drawn monthly wages × 15 × Years of service ÷ 26. Wages mean basic pay plus dearness allowance. Service of more than 6 months in the last year counts as a full year.
Who is eligible for gratuity?
Permanent employees become eligible after 5 years of continuous service with the same employer. Under the Code on Social Security, in force since 21 November 2025, fixed-term employees are eligible after just 1 year. The 5-year condition does not apply on death or disability.
Is gratuity taxable?
For private-sector employees, gratuity is tax-free up to ₹20,00,000 over the whole career; any amount above that is taxed at your slab rate. Gratuity received by government employees is fully tax-free.
Why is the formula divided by 26?
The law treats a month as 26 working days. Fifteen days’ wages for each year of service is therefore monthly wages × 15 ÷ 26.
What if my employer is not covered by the gratuity law?
Employers with fewer than 10 employees are generally not covered. If they still pay gratuity, it is usually calculated as half a month’s average salary for each completed year: wages × 15 × completed years ÷ 30.
How do the new labour codes affect gratuity?
Besides eligibility after 1 year for fixed-term staff, the labour codes define wages to be at least half of total pay. If your employer raises basic pay to meet this, your gratuity rises too.
Sources
Last updated 19 September 2026. Results are estimates for planning only and are not investment, tax or legal advice. See our disclaimer.