In short
Gratuity is a lump sum your employer pays when you resign, retire or your employment ends after long service. The law sets it at 15 days of wages for every year worked, up to ₹20 lakh. Since the new labour codes took effect on 21 November 2025, fixed-term employees qualify after one year and wages must be at least half of total pay.
The formula
Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service. The 26 stands for the working days in a month, so you get 15 days of wages for each year. A part of a year longer than six months counts as a full year: 10 years and 7 months count as 11 years, 10 years and 6 months as 10.
The law applies to employers with ten or more employees. Employers outside it who pay gratuity usually use 15 ÷ 30 and completed years only.
Worked example
Last drawn wages ₹50,000 a month and 10 years of service: ₹50,000 × 15 ÷ 26 × 10 = ₹2,88,462. All of it is tax-free.
With wages of ₹60,000 and 7 years 8 months, the service counts as 8 years: ₹60,000 × 15 ÷ 26 × 8 = ₹2,76,923.
What changed with the new labour codes
The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972 on 21 November 2025. The formula and the ₹20 lakh limit stay the same, but two things changed.
First, wages now mean basic pay, dearness allowance and retaining allowance, and they must be at least 50% of your total pay: if your allowances are more than half, the excess is counted as wages. For people with a low basic salary this raises the gratuity. Second, employees on a fixed-term contract earn gratuity after one year, in proportion to the time worked.
Tax on gratuity
For private-sector employees gratuity is tax-free up to ₹20 lakh over your whole working life, across all employers. Anything above that is added to your salary income and taxed at your rate. The exemption applies in both tax regimes.
This calculator is for private-sector employees. Government employees are paid under their own pension rules, with a ₹25 lakh ceiling for central government staff, and their gratuity is fully tax-free.
Frequently asked questions
When am I eligible for gratuity?
After five years of continuous service with the same employer, when you resign, retire or are terminated. The five years are not required if employment ends through death or disablement, and fixed-term employees qualify after one year.
Do 4 years and 8 months count as 5 years?
Some courts have held that 4 years plus 240 working days in the fifth year (190 days where the working week is shorter than six days) is enough, but employers do not all follow this. The calculator uses five completed years; ask your employer how they treat your case.
What are 'wages' for gratuity?
Basic pay plus dearness allowance (and retaining allowance, if any). HRA, bonus, overtime and most other allowances are left out, but under the new codes only up to 50% of total pay: anything excluded beyond that is added back to wages.
Is there a maximum?
Yes. Under the law the gratuity is limited to ₹20 lakh. An employer may pay more under its own scheme, but the amount above ₹20 lakh is taxable.
How soon must gratuity be paid?
Within 30 days of the date it becomes payable. After that the employer owes interest on the amount.
Is gratuity part of my CTC?
Often yes: many employers show about 4.81% of basic pay (15 ÷ 26 ÷ 12) as a gratuity component. You only receive it if you complete the qualifying service.
Methodology
Covered by the law: wages × 15 ÷ 26 × years, where a part of a year above six months counts as one year, limited to ₹20 lakh. Fixed-term contract: years and months are counted in proportion (months ÷ 12); some employers round to full years instead. Not covered: wages × 15 ÷ 30 × completed years, without a limit; this is the usual practice, but the employer's own scheme decides, including how many years are needed. The tax-free amount is the gratuity up to ₹20 lakh, assuming no gratuity was exempted earlier and that last drawn wages equal the average of the last ten months.
This calculator gives estimates for information only and is not legal or tax advice. Your employer's records and scheme decide the actual amount.
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