Gratuity Calculation Formula Under the New Labour Code

Gratuity = 15 ÷ 26 × your last drawn monthly wages × years of service. "Wages" means basic pay plus dearness allowance, not your gross salary, and a part-year of more than six months counts as a full year. On ₹50,000 of basic + DA and 10 years 7 months of service, that is ₹3,17,308. You normally need five years of continuous service, and the amount payable is capped at ₹20 lakh.

Since 21 November 2025 these rules sit in the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. Two changes matter for most people: fixed-term employees now qualify after one year, and allowances above half your pay are added back to wages. Every example below comes from the site's gratuity calculator, so you can check your own numbers the same way.

The gratuity formula, step by step

The law gives 15 days' wages for every year of service. For a monthly-paid employee, a day's wage is the monthly wage divided by 26, the number of working days the law assumes in a month. So one year of service earns 15/26 of a month's wages, about 57.7%.

1. Take your last drawn monthly basic + DA: say ₹50,000.
2. Find one year's gratuity: 15 ÷ 26 × ₹50,000 = ₹28,846.
3. Count your years of service. Complete years count in full; the leftover part counts as one more year only if it is more than six months.
4. Multiply: ₹28,846 × years counted.

The six-month rule makes a real difference near the cut-off:

Exactly six months is not "more than six months", so it doesn't round up. Staying from 10 years 5 months to 10 years 7 months adds a full year, ₹28,846 here. If you're planning to resign, check where you stand before you fix your last working day; your notice period may decide it.

Basic or gross? What "wages" means now

Gratuity is calculated on wages, not gross salary. Under the Labour Codes, wages are basic pay, dearness allowance and retaining allowance (if any). Items such as HRA, conveyance allowance, overtime, commission, the employer's PF contribution and statutory bonus are left out.

There is one important catch, the 50% rule. If the excluded allowances add up to more than half of your total pay, the excess is added back to wages. The Ministry of Labour's FAQs also say performance incentives, ESOPs, the variable part of pay and reimbursements are not wages. The rule applies from 21 November 2025, the date the Code came into force, and not retrospectively.

A worked example of the add-back:

• Total monthly pay: ₹1,00,000. Basic + DA: ₹40,000. HRA, special allowance and other allowances: ₹60,000.
• Half of total pay is ₹50,000. Allowances exceed that by ₹60,000 − ₹50,000 = ₹10,000.
• Wages for gratuity = ₹40,000 + ₹10,000 = ₹50,000.

For 10 years of service, gratuity on ₹40,000 would have been ₹2,30,769. On the corrected wages of ₹50,000 it is ₹2,88,462, which is ₹57,693 more. This is why many employers now set basic pay at about 50% of CTC; the same wage definition now also applies to PF, as explained in the guide to the ₹25,000 EPF wage ceiling.

Who is eligible: the five-year rule and its exceptions

Gratuity is payable when your employment ends by superannuation, retirement, resignation, death, disablement due to accident or disease, the end of a fixed-term contract, or any other event the Central Government notifies. For resignation and retirement you need at least five years of continuous service with the same employer.

The five-year condition does not apply:

• on death: gratuity goes to your nominee or legal heirs;
• on disablement due to accident or disease;
• to fixed-term employees, who are paid gratuity pro rata once they complete one year of service.

The law covers every factory, mine, oilfield, plantation, port and railway company, and every shop or establishment that employed 10 or more people on any day in the previous 12 months. The employer must pay within 30 days of the gratuity becoming payable.

Example: a fixed-term employee with 1 year 8 months

Say your fixed-term contract ends after 1 year 8 months on a basic of ₹30,000. The calculator applies the usual rounding: 8 months is more than six, so 2 years count, and gratuity is 15 ÷ 26 × ₹30,000 × 2 = ₹34,615. The Code says fixed-term gratuity is paid "on a pro rata basis" but doesn't spell out how part-years are treated. If your employer pays strictly for the 20 months worked, the figure is 15 ÷ 26 × ₹30,000 × 20/12 = ₹28,846. Ask HR which method your employer uses.

The ₹20 lakh ceiling

The maximum gratuity payable under the law is notified by the Central Government and is ₹20 lakh as of October 2026. It mostly affects long-serving, well-paid employees. Example: basic + DA of ₹1,50,000 and 25 years of service gives 15 ÷ 26 × ₹1,50,000 × 25 = ₹21,63,462 by formula, but the legal entitlement stops at ₹20,00,000. An employer may pay more under its own policy or an agreement; the law doesn't stop better terms.

Is gratuity taxable?

Under the Income-tax Act, 2025, gratuity is handled as a deduction from salary income (section 19), replacing the old section 10(10). How much is tax-free depends on who you work for:

The ₹20 lakh is a lifetime limit across all employers, so tax-free gratuity from an earlier job uses up part of it. Anything above the limit is taxed as salary at your slab rate.

For employees whose employer isn't covered, the tax rule uses a different formula: 15/30 instead of 15/26, the average salary of the last 10 months, and completed years only, with no rounding up. On a ₹50,000 average and 10 years 7 months of service, the tax-free ceiling is 15 ÷ 30 × ₹50,000 × 10 = ₹2,50,000, compared with ₹3,17,308 for a covered employee with the same pay and service. Such employers aren't legally required to pay gratuity at all; this formula only decides how much of a voluntary payment is tax-free. To see how it fits into your overall tax, use the income tax calculator.

Why your CTC shows gratuity at 4.81% of basic

Many offer letters list a gratuity line at 4.81% of basic. The number comes straight from the formula: one year of service earns 15/26 of a month's basic, and spreading that over 12 months gives 15 ÷ 26 ÷ 12 = 0.0481, or 4.81% of annual basic. On a basic of ₹10 lakh a year, that's ₹48,100 shown in CTC every year.

Three things to know about that line:

• It is a provision, not money paid to you each year. If you leave before five years (and none of the exceptions apply), you get nothing for it.
• The final payout uses your last drawn wages, so after several raises it is usually more than the total of the yearly 4.81% amounts.
• If your employer includes it in CTC, your cash salary is lower by that amount. The in-hand salary guide shows the effect: ₹3,175 a month on a ₹20 lakh CTC. You can test your own offer with the in-hand salary calculator.

Central government employees: CCS rules

Central government employees get retirement gratuity under the CCS (Pension) Rules, 2021, not the Code. The formula is one quarter of emoluments (basic pay + DA) for each completed six-month period of qualifying service, up to 16½ times monthly emoluments, with a ceiling of ₹25 lakh. At least five years of qualifying service is needed. On ₹50,000 and 10 years 7 months, the calculator counts 21 six-month periods: ¼ × ₹50,000 × 21 = ₹2,62,500, all of it tax-free. State governments have their own rules.

This article is general information as of October 2026, not legal or tax advice; your employer's gratuity policy and the final rules under the Code decide your exact amount.

Frequently asked questions

Is gratuity calculated on basic or gross salary?

On basic pay plus DA (and retaining allowance, if any), not gross. But if your allowances are more than half your total pay, the excess is added to basic + DA for the calculation, from 21 November 2025.

Do I get gratuity if I resign?

Yes, if you have completed five years of continuous service with that employer and the employer is covered by the law. Resignation is one of the events on which gratuity becomes payable.

What is the new gratuity rule for fixed-term employees?

Under the Code on Social Security, a fixed-term employee is paid gratuity pro rata when the contract ends, after completing one year of service. Earlier, the five-year condition applied to them as well.

How soon must my employer pay gratuity?

Within 30 days of it becoming payable, usually your last working day.

Is gratuity paid on top of my CTC?

It depends on your offer letter. If it lists gratuity (often at 4.81% of basic), it is part of CTC. If not, the employer pays it separately when you become eligible. Either way, the amount you receive follows the same formula.

Sources: Code on Social Security, 2020 (sections 53 and 56), in force from 21 November 2025; Code on Wages, 2019 (definition of wages); Ministry of Labour and Employment, FAQs on the Labour Codes and Labour Codes handbook; Income-tax Act, 2025 (section 19); CBDT notification on the ₹20 lakh tax-free limit (2019); CCS (Pension) Rules, 2021 and the Department of Pension and Pensioners' Welfare order raising the ceiling to ₹25 lakh. Figures from the EthicalFusion gratuity calculator.