How to Calculate Gratuity in India: Formula with Examples

Gratuity is a lump sum an employer pays when an employee leaves after a qualifying period of service, and knowing how to calculate gratuity correctly matters for both full and final settlements and for the monthly provision in your books. The formula is short: 15/26 multiplied by last drawn wages multiplied by years of service. The questions that follow are harder. Which wages count after the Code on Wages? How do you round partial years? What changes for fixed-term employees under the Code on Social Security? How much is tax-free? This guide answers each, with worked examples.

The Legal Basis After 21 November 2025

Gratuity was governed by the Payment of Gratuity Act, 1972. With the Labour Codes in force from 21 November 2025, gratuity provisions now sit in the Code on Social Security, 2020, and the wage base follows the Code on Wages definition. The core formula and the five-year rule for permanent employees carry over, with two important changes:

• Fixed-term employees become eligible for gratuity on a pro rata basis after one year of service.
• Wages for gratuity follow the 50% rule: if excluded allowances exceed half of total remuneration, the excess is added to wages.

State and central rules under the Code may refine details, so check the latest notifications for your establishment.

Who Is Eligible for Gratuity

Situation	Eligibility
Permanent employee resigning or retiring	After 5 years of continuous service
Fixed-term employee	Pro rata, after 1 year of service
Death or disablement due to accident or disease	No minimum service required
Termination for misconduct causing damage	Gratuity may be forfeited to the extent of damage, or wholly in specified cases

"Continuous service" includes periods of authorised leave, lay-off and similar interruptions. Several court rulings have treated four years and 240 days in the fifth year as completing five years in specific cases; employers should take advice before relying on this for a particular exit.

The Gratuity Formula

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

• 15: fifteen days' wages for every year of service.
• 26: the number of working days in a month assumed by law (excluding four Sundays).
• Last drawn wages: basic plus DA (and any amount added back under the 50% rule) at the time of exit.
• Years of service: a part year of more than six months counts as a full year; six months or less is ignored.

For employees on piece rates or seasonal establishments, the law prescribes different averaging methods. This guide covers monthly-rated employees, who are the large majority.

Worked Example 1: Standard Resignation

Meena resigns after 8 years and 7 months. Her last drawn basic plus DA is ₹52,000.

1. Years of service: 8 years 7 months. Seven months is more than six, so round up to 9 years.
2. Daily rate for 15 days: ₹52,000 × 15 / 26 = ₹7,80,000 / 26 = ₹30,000.
3. Gratuity: ₹30,000 × 9 = ₹2,70,000.

Worked Example 2: Partial Year Ignored

Arjun leaves after 6 years and 5 months. Last drawn basic plus DA is ₹40,000.

1. Five months is not more than six, so service = 6 years.
2. ₹40,000 × 15 / 26 = ₹23,076.92.
3. Gratuity: ₹23,076.92 × 6 = ₹1,38,461.54, paid as ₹1,38,462 after rounding.

Worked Example 3: The 50% Rule Raises the Base

Sunil's monthly pay is ₹60,000: basic ₹18,000, HRA ₹9,000 and special allowance ₹33,000. He leaves after 10 years.

• Exclusions = ₹42,000, which is 70% of ₹60,000.
• Permitted 50% = ₹30,000. Excess ₹12,000 is added to wages.
• Gratuity wages = ₹18,000 + ₹12,000 = ₹30,000.
• Gratuity = ₹30,000 × 15 / 26 × 10 = ₹4,50,000 / 26 × 10 = ₹17,307.69 × 10 = ₹1,73,076.92, rounded to ₹1,73,077.

On basic alone, the figure would have been ₹18,000 × 15 / 26 × 10 = ₹1,03,846. The difference of about ₹69,000 is why restructuring salary to meet the 50% rule has a real cost impact, especially for long-service employees.

Worked Example 4: Fixed-Term Employee

Kavya is on a two-year fixed-term contract with basic plus DA of ₹35,000 and leaves at contract end after exactly 2 years.

1. She qualifies because service exceeds one year.
2. ₹35,000 × 15 / 26 = ₹20,192.31.
3. Gratuity for 2 years = ₹40,384.62, rounded to ₹40,385.

How partial years are treated for fixed-term staff (for example, 1 year 4 months) may depend on the rules notified for your establishment. Many employers compute pro rata by months; confirm with the applicable rules.

Maximum Gratuity and Tax Treatment

Statutory ceiling

The statutory ceiling on gratuity payable has been ₹20 lakh for private sector employees. Employers can pay more under their own policy, but anything above the ceiling is ex-gratia. Ceilings are revised by notification, so check the current limit.

Income tax exemption

Gratuity received on retirement or resignation is exempt within limits, and this exemption remains available whether the employee is in the old or the new tax regime. For non-government employees covered by the gratuity law, the exempt amount is the least of:

• Actual gratuity received.
• The statutory limit (₹20 lakh as last notified; verify for the current tax year).
• 15/26 × last drawn wages × completed years of service (as computed above).

For employees not covered by the gratuity law, a different formula applies: half a month's average salary of the last ten months for each completed year, without rounding up part years. Government employees' gratuity is fully exempt. The Income-tax Act, 2025 renumbered the provisions that grant this exemption, so refer to the current Act when citing sections.

Gratuity paid during service

Gratuity received while still employed (rare, but it happens in some restructurings) is fully taxable as salary.

Paying Gratuity: Timelines and Process

1. The employee (or nominee) applies, usually through a form specified under the rules; many employers process it automatically with the full and final settlement.
2. The employer determines the amount and informs the employee.
3. Payment must be made within 30 days of it becoming payable. Delay attracts simple interest at the notified rate.
4. Include it in the salary certificate and compute TDS on any taxable portion.

Our full and final settlement guide shows how gratuity fits into the exit calculation alongside leave encashment and notice pay.

Monthly Gratuity Provision for Your Books

Under accounting standards (AS 15 or Ind AS 19), gratuity is a defined benefit obligation measured by actuarial valuation. For management reporting and CTC, many companies accrue 4.81% of basic plus DA monthly (15/26 ÷ 12 = 0.0481). For an employee with basic of ₹50,000, the monthly provision is ₹2,405. Larger employers often fund gratuity through an insurer-managed group gratuity scheme, which can also help with tax deductibility of contributions.

Funding Gratuity: Self-Funded vs Group Gratuity Scheme

Employers choose between two approaches:

Basis	Self-funded (book provision)	Group gratuity scheme with an insurer
Cash flow	Paid from operating cash when employees leave	Annual premium to the insurer; claims paid from the fund
Tax deduction for the employer	Generally only when actually paid	Contributions to an approved gratuity fund are generally deductible when made
Risk	A wave of exits can strain cash	Spread through the fund
Administration	Internal calculation and actuarial valuation	Insurer handles valuation and claims; employer still verifies amounts

Small companies often start self-funded and move to a group scheme as headcount grows. Either way, the amount payable to the employee is set by the law and your policy, not by what the fund holds.

Nomination

Employees should file a gratuity nomination soon after joining, so that payment on death goes to the nominee without delay. Keep the nomination updated after marriage or other changes in family.

Transfers between group companies

Where an employee moves between group companies, check whether service is treated as continuous. If the new entity takes over the liability, record it in the transfer letter; otherwise the first employer should settle gratuity on the transfer if the employee is eligible.

Common Gratuity Mistakes

• Using gross salary instead of basic plus DA (plus the 50% add-back).
• Dividing by 30 instead of 26 for monthly-rated employees covered by the law.
• Rounding six months up instead of requiring more than six months.
• Denying gratuity to fixed-term employees with more than one year of service.
• Missing the 30-day payment deadline during a slow exit process.
• Applying the ceiling to the exemption but forgetting to compute TDS on the excess.

Calculating Gratuity in Fininvo

Fininvo Payroll includes gratuity calculation as part of its compliance features, so the payout and the provision use the same configured wage components. See payroll compliance features and Fininvo Payroll.

Frequently Asked Questions

Is gratuity calculated on basic or gross salary?

On last drawn basic plus DA, with any excess of excluded allowances over 50% of total remuneration added back under the Code on Wages. It is not calculated on gross salary.

Can I get gratuity before 5 years?

Permanent employees generally need five years of continuous service, except on death or disablement. Fixed-term employees qualify pro rata after one year under the Code on Social Security.

Is gratuity taxable under the new tax regime?

The retirement and resignation gratuity exemption is available under both regimes, up to the statutory limit. Amounts above the exempt limit are taxed as salary.

Why is the divisor 26 and not 30?

The law assumes 26 working days in a month for monthly-rated employees, which makes 15 days' wages slightly more generous than dividing by 30.

Is this legal advice?

No. This is general information. Rules under the Labour Codes and the Income-tax Act, 2025 continue to be notified, so verify current limits and consult a professional for specific cases.