Gratuity Calculation 2026: Formula, Eligibility and Tax

Gratuity is a lump sum your employer pays when you leave after qualifying service. The standard formula is last drawn basic pay plus DA × 15/26 × years of service. As of October 2026, permanent employees qualify after five years, fixed-term employees after one year under the Code on Social Security, and up to ₹20 lakh of gratuity is tax-free for private-sector employees.

What changed with the labour codes

The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972, with the gratuity provisions taking effect on 21 November 2025, prospectively. Three changes matter most:

The 50% wage rule is the one most people feel. If your basic pay was only 30% to 40% of your pay, the excess allowances above half of total remuneration are added back into "wages". That raises gratuity, and PF, for many private-sector employees. Some central rules under the codes were still being finalised in 2026, so check your employer's policy and the Labour Ministry's notifications.

Who is eligible

• Permanent employees: five years of continuous service. Some courts have treated four years and 240 days of work in the fifth year as five years of continuous service, but do not rely on this without checking the facts of your case.
• Fixed-term employees: after one year under the contract, gratuity is payable in proportion to service.
• On death or disablement: no minimum service; gratuity goes to the nominee or legal heirs.
• Termination for misconduct: gratuity can be forfeited in whole or part in limited cases, such as damage to the employer's property or an offence involving moral turpitude, subject to due process.

The gratuity law applies to establishments with 10 or more employees. If your employer is not covered, it may still pay gratuity under its own policy, but the formula used for tax is different (see below).

The formula

Covered employees:

Gratuity = Last drawn monthly wages × 15/26 × completed years of service

• 15 = 15 days' wages per year of service
• 26 = working days in a month
• A final part year longer than six months counts as a full year

Employees not covered (for the tax exemption calculation):

Gratuity = ½ × average monthly salary of the last 10 months × completed years of service (part years are ignored)

Worked examples

Example 1: a covered employee. Divya's last drawn basic + DA is ₹60,000 a month. She resigns after 7 years and 8 months.

• Years counted: 8 (the 8 months exceed six months)
• Gratuity: ₹60,000 × 15/26 × 8
• ₹60,000 × 15 = ₹9,00,000; ÷ 26 = ₹34,615.38; × 8 = ₹2,76,923

This is below ₹20 lakh, so it is fully tax-free.

Example 2: the same numbers, employer not covered. Average salary of the last 10 months is ₹60,000, completed years are 7.

• ½ × ₹60,000 × 7 = ₹2,10,000 exempt

If the employer actually pays ₹2,76,923 under its own policy, ₹66,923 is taxable as salary.

Example 3: a fixed-term employee. Imran's two-year contract ends after exactly two years. His wages are ₹40,000 a month.

• ₹40,000 × 15/26 × 2 = ₹46,154

Under the old law he would have received nothing.

Example 4: a senior executive. Last drawn basic + DA ₹3,00,000 a month, 22 years of service.

• ₹3,00,000 × 15/26 × 22 = ₹38,07,692
• Exempt: ₹20,00,000
• Taxable as salary: ₹18,07,692

The statutory gratuity payable is also capped (₹20 lakh as of October 2026), so an employer is legally obliged to pay only up to that ceiling. Many large employers pay the full formula amount under their own policy; check yours.

Tax on gratuity

Points to note as of October 2026:

• The exemption was in Section 10(10) of the 1961 Act. Published section mappings place it in Section 19 of the Income-tax Act, 2025 for tax year 2026-27 onward, with the same limits.
• ₹20 lakh is a lifetime limit. Exempt gratuity from earlier employers reduces what you can claim tax-free later.
• Some reports in 2026 suggested a higher ₹25 lakh ceiling; that figure applies to certain central government payouts. We could not confirm any notification raising the ₹20 lakh tax-free limit for private-sector employees as of October 2026.
• The exemption is available in both regimes, because it is an exemption, not a Chapter VIII deduction.
• Gratuity received while still in service (for example on a policy change) is fully taxable.
• Taxable gratuity received in a lump sum can raise your slab for that year. Relief for salary received in arrears or in advance (Section 157, old Section 89) may help when gratuity is taxable.

Estimate the effect of a taxable portion with the income tax calculator.

Common mistakes when checking your gratuity

• Using gross salary or CTC in the formula instead of basic + DA (plus any add-back under the 50% wage rule)
• Counting only completed years for a covered employer, and losing a final part year of more than six months
• Assuming the ₹20 lakh tax-free limit resets with every job
• Treating the gratuity line in a CTC letter as money you will definitely receive, even if you leave before qualifying

How to claim and when it must be paid

1. Apply in writing to your employer, in its prescribed form, within the time it allows after leaving (many employers process it automatically with the full and final settlement).
2. Check the calculation: wages used, years counted, and whether the 50% wage rule was applied.
3. Payment: the gratuity law expects payment within 30 days of it becoming payable, with simple interest if delayed.
4. If unpaid or disputed, apply to the Controlling Authority under the gratuity law, an officer of the labour department for your establishment.
5. Nominate. Keep a nomination with your employer so your family does not have to prove succession.

Gratuity is part of your CTC on paper but is not in your monthly pay; see CTC vs gross vs take-home salary. When changing jobs, also sort out your PF; our guide to EPF when changing jobs covers the transfer.

Key takeaways

• Gratuity = last drawn basic + DA × 15/26 × years of service; a final part year of more than six months counts as a full year.
• From 21 November 2025, fixed-term employees qualify after one year, and the 50% wage rule can raise the wages used in the formula.
• Permanent employees still need five years, except on death or disablement.
• As of October 2026, up to ₹20 lakh (lifetime) is tax-free for private-sector employees in both regimes; government employees' gratuity is fully exempt.
• If gratuity is delayed beyond 30 days, interest applies, and you can approach the labour department's Controlling Authority.