Gratuity formula
For employers covered by gratuity law, which generally means establishments with 10 or more employees, gratuity is 15 days' wages for every completed year of service, where a month is treated as 26 working days:
Gratuity = Last drawn (basic + DA) × 15 ÷ 26 × years of service
For employers not covered, gratuity is voluntary. Where they pay it, the common practice is half a month's salary per year, which works out as × 15 ÷ 30.
How years of service are counted
Under the long-standing rule for covered employers, a part year of more than six months is rounded up to a full year, and six months or less is ignored. So 7 years 8 months counts as 8 years, and 7 years 6 months counts as 7 years. The calculator applies this rule for permanent and government employees. For fixed-term employees, gratuity is pro-rata, so the calculator uses the exact service in years and months.
Worked example
Rahul's last drawn basic + DA is ₹50,000 a month and he worked for 7 years 8 months at a company with 50 employees.
| Service counted | 8 years (8 months is more than 6) |
| Calculation | 50,000 × 15 ÷ 26 × 8 |
| Gratuity | ₹2,30,769 |
What changed under the new labour code
The Code on Social Security, 2020 brought gratuity under the new labour codes, which came into force on 21 November 2025. The main changes for employees are:
- Fixed-term employees become eligible for pro-rata gratuity after one year of continuous service, instead of five years.
- The 50% wages rule: if allowances excluded from wages exceed half of your total pay, the excess is treated as wages. For people whose basic was a small part of their salary, this can raise gratuity.
- Permanent employees still generally need five years of continuous service, except on death or disablement, where the condition does not apply.
For the official text of the labour codes and rules, see the Ministry of Labour and Employment.
Is gratuity taxable?
| Employee type | Tax treatment |
|---|---|
| Central and state government | Fully exempt from income tax |
| Private, covered employer | Exempt up to the least of: actual gratuity, ₹20 lakh, or the formula amount. The rest is taxed as salary. |
| Private, not covered | Exempt up to the least of: actual gratuity, ₹20 lakh, or half a month's average salary per completed year |
The ₹20 lakh limit is a lifetime limit across all employers. The Income Tax Department publishes the exemption rules under Section 10(10).
Tips before you resign
- Check your last drawn basic + DA. Gratuity uses the last month's figure, so an increment just before you leave helps.
- Watch the six-month line. Leaving at 4 years 7 months can count as 5 years at many employers; leaving at 4 years 6 months does not. Confirm your employer's view of continuous service.
- Claim in writing. Submit the gratuity claim form to your employer and keep a copy. Employers are expected to pay within a set time after it becomes payable.
- Update your nomination so your family can claim without delay if something happens.
Frequently asked questions
How is gratuity calculated in India?
For covered employers: last drawn basic + DA × 15 ÷ 26 × completed years of service, with a part year above six months rounded up.
What is the minimum service for gratuity?
Five years of continuous service for permanent employees, and one year for fixed-term employees under the new labour code. The condition does not apply on death or disablement.
Is 4 years 7 months eligible for gratuity?
Courts have accepted that 4 years and about 240 days of work in the final year can count as five years in some cases. Practice varies, so check with your employer.
How much gratuity is tax-free?
For private employees, up to ₹20 lakh in total, subject to the formula. Government employees' gratuity is fully exempt.
Does the new labour code increase gratuity?
It can, if your basic pay was less than half your total pay, because of the 50% wages rule. Fixed-term employees also become eligible sooner.