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Gratuity: How It's Calculated, Who Gets It, and the New 1-Year Rule
Quick Work Studio · 2026-10-27
Gratuity is a lump sum your employer pays when you leave after several years of work, as a thank-you for long service. It's paid on top of your salary and EPF, and in most cases it's tax-free. The labour codes that came into force on 21 November 2025 also changed who qualifies.
The formula
Gratuity = last drawn salary × 15 ÷ 26 × years of service
- Salary means basic pay plus dearness allowance (DA) for your last month.
- 15 ÷ 26 is 15 days' pay for each year, counting 26 working days in a month.
- Years are rounded: more than 6 months in the last year counts as a full year. So 7 years 8 months is 8 years, but 7 years 5 months is 7.
Worked examples
| Basic + DA | Service | Counted as | Gratuity |
|---|---|---|---|
| ₹25,000 | 5 years 3 months | 5 years | ₹72,115 |
| ₹40,000 | 7 years 8 months | 8 years | ₹1,84,615 |
| ₹60,000 | 12 years | 12 years | ₹4,15,385 |
| ₹1,00,000 | 20 years 7 months | 21 years | ₹12,11,538 |
Who qualifies
- Permanent employees: after 5 years of continuous service with the same employer. This hasn't changed.
- Fixed-term employees (hired on a contract for a set period): under the new labour codes, after just 1 year, in proportion to the time worked. A fixed-term worker with ₹25,000 basic pay who completes one year gets about ₹14,423.
- Death or disability: gratuity is paid whatever the length of service, to you or your nominee.
The new codes also say that basic pay and similar parts must be at least half of your total pay. If your employer kept basic pay low and the allowances high, your gratuity base may go up.
If your employer isn't covered
The rules above apply to organisations with 10 or more employees. A smaller employer may still pay gratuity, but usually with 15 ÷ 30 instead of 15 ÷ 26, and counting only completed years. For the same salary, that gives about 13% less.
Limits and tax
- The most an employer must pay under the law is ₹20 lakh. Some companies pay more by policy.
- For private-sector employees, gratuity is tax-free up to ₹20 lakh over their whole career. Anything above is taxed as salary.
- For central and state government employees, gratuity is fully tax-free.
- Your employer must pay within 30 days of it becoming due, or pay interest on the delay.
Tips
- Check your appointment letter for whether you are permanent or fixed-term.
- Make sure you've filled in the gratuity nomination form, so your family can claim it easily.
- If you are a few weeks short of the 6-month mark in your last year, staying until it passes adds a full year's gratuity.
Try it: the Gratuity Calculator rounds your service, applies the right formula and shows the tax-free part. Add it to your savings with the Retirement Calculator, and see your EPF with the EPF Calculator.