For employees covered by the law, gratuity is 15 days' wages for every year of service, based on the last wages drawn. A month is treated as 26 working days, which gives the familiar formula:
Gratuity = Last drawn wages × 15 ÷ 26 × Years of serviceCapped at ₹20 lakh for private-sector employees
Under the Code on Social Security, 2020 (in force since 21 November 2025), the formula is unchanged. What changed is who qualifies and what counts as wages.
Who is eligible?
| Employee | Minimum service | How years are counted |
|---|
| Permanent employee | 5 years of continuous service | Completed years; a final part-year of more than 6 months counts as a full year |
| Fixed-term employee | 1 year | Pro-rata for the actual period served |
| Death or disablement | None | Paid to the employee or nominee |
The six-month rule7 years and 8 months counts as 8 years. 7 years and 5 months counts as 7 years. For fixed-term employees, gratuity is pro-rata, so 18 months counts as 1.5 years.
What counts as "last drawn wages"?
Gratuity uses the common definition of wages from the labour codes: basic pay, dearness allowance and retaining allowance. If excluded items such as HRA and conveyance are more than half of total pay, the excess is added back to wages. For many employees this raises the gratuity base. See the 50% wage rule explained for worked examples.
Worked examples
| Situation | Working | Gratuity |
|---|
| Permanent, ₹40,000 wages, 7 years 8 months | 40,000 × 15 ÷ 26 × 8 | ₹1,84,615 |
| Permanent, ₹40,000 wages, 7 years 5 months | 40,000 × 15 ÷ 26 × 7 | ₹1,61,538 |
| Fixed-term, ₹30,000 wages, 18-month contract | 30,000 × 15 ÷ 26 × 1.5 | ₹25,962 |
| Permanent, ₹30,000 wages, 4 years 2 months, resigns | Less than 5 years | Not eligible |
Ceiling, tax and payment
- Ceiling: statutory gratuity for private-sector employees is capped at ₹20 lakh. Employers can pay more voluntarily.
- Tax: gratuity is tax-free up to ₹20 lakh over a lifetime for non-government employees, under both the old and new tax regimes. Government employees are fully exempt.
- Payment: the employer must pay within 30 days of gratuity becoming payable. Late payment attracts simple interest.
For employers: provision every month
Gratuity is a growing liability on every payroll. With fixed-term staff now eligible after one year and the wider wage definition raising the base, it is worth recalculating your provision on current wages, ideally every month, rather than discovering it at exit. GoHRMS payroll calculates gratuity in full-and-final settlements automatically.
Frequently asked questions
Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service. A final part-year of more than six months counts as a full year. Wages means basic pay plus DA, plus any amount added back under the 50% rule of the labour codes.
Permanent employees after five years of continuous service; the five-year condition does not apply on death or disablement. Since 21 November 2025, fixed-term employees get gratuity on a pro-rata basis after one year.
The statutory ceiling for private-sector employees is ₹20 lakh. Gratuity is also tax-free up to ₹20 lakh over a lifetime for non-government employees, under both tax regimes.
Within 30 days of it becoming payable. If the employer pays late, simple interest is due for the period of delay.
Often, yes. Gratuity is calculated on wages as defined by the Code on Wages. If allowances are more than 50% of pay, the excess is added to wages, which raises the gratuity base.
Sources:
Fixed-term gratuity under Section 53 (CalcGuru) ·
Formula and six-month rule, s.53(2) (Ethika) ·
Rs 20 lakh limit, tax and 30-day payment (CalcGuru).
This calculator gives an estimate for employees covered by the gratuity law and is not legal or tax advice.