What is the gratuity formula in India?

For employees covered under the Social Security Code 2020 (or earlier Payment of Gratuity Act): Gratuity = (15/26) × Last Drawn Wages × Years of Service. For employees not covered: Gratuity = (15/30) × Last Drawn Wages × Years of Service. Wages must be at least 50% of CTC as per Code of Wages 2019. The maximum gratuity is ₹20 lakh for private sector and ₹25 lakh for central government employees.

Is gratuity taxable in India?

Gratuity is fully tax-exempt under Section 10(10)(i). For private sector employees covered by the Gratuity Act, gratuity is tax-exempt up to ₹20 lakh under Section 10(10)(ii). Any amount exceeding ₹20 lakh is taxable as salary income. For employees of non-covered companies, the exemption limit under Section 10(10)(iii) is also ₹20 lakh.

What changed in gratuity rules under Social Security Code 2020?

Three key changes under the Social Security Code 2020 effective November 21, 2025: (1) Fixed-term employees are now eligible after 1 year (previously not covered); (2) The wage base for gratuity calculation must be at least 50% of CTC as per Code of Wages 2019; (3) Government employee cap increased to ₹25 lakh. The formula (15/26) and ₹20 lakh private sector cap remain unchanged.

Gratuity Calculator 2026 – Social Security Code New Rules

Employee Type

Monthly CTC₹1,00,000

Last Drawn Wages (Basic+DA) ≥50% CTC ₹50,000

Years of Service10 yr

Gratuity Payable

₹2,88,462

Years of service —

Tax-free amount —

Employee TypePermanent

Monthly Wages Used₹50,000

Wages % of CTC50%

Effective Years10

Formula(15/26)×W×Y

Raw Amount₹2,88,462

Statutory Cap₹20,00,000

Final Gratuity₹2,88,462

💰 Tax Treatment (Sec 10(10))

Component	Amount	Status

📜 Old Law vs New Law — Side by Side

Rule	Payment of Gratuity Act 1972 Replaced	Social Security Code 2020 Active from Nov 21, 2025
Permanent employee min service	5 continuous years	5 continuous years (unchanged)
Fixed-term employee eligibility	❌ Not eligible	✅ 1 year (pro-rata)
Wages definition / calculation base	Basic + DA (employer could manipulate)	✅ Wages ≥ 50% of CTC; excess allowances added back
Formula (covered companies)	(15/26) × Salary × Years	(15/26) × Wages × Years (unchanged)
Formula (not covered)	(15/30) × Salary × Years	(15/30) × Wages × Years (unchanged)
Cap — Private sector	₹20,00,000	₹20,00,000 (unchanged)
Cap — Central Govt employees	₹20,00,000	✅ ₹25,00,000 (Jan 2024 DA hike)
Tax-exempt — Private (Sec 10(10)(ii))	Up to ₹20 lakh	Up to ₹20 lakh (unchanged)
Tax-exempt — Govt (Sec 10(10)(i))	Fully exempt	Fully exempt (unchanged)
Year rounding rule	>6 months = full year	>6 months = full year (unchanged)
Gig / Platform workers	❌ Not covered	✅ Covered (state rules being notified)
Payment deadline	30 days from due date	30 days from due date (unchanged)

⚖️ Important: The Social Security Code 2020 is legally effective from Nov 21, 2025 across India. State-level subordinate rules are still being notified and may cause phased implementation. Consult a labour law professional for your specific situation.

📅 Last Updated: April 15, 2026

FY 2026-27

🏛️ Source: Government of India

On this page

What is Gratuity
Formula
How to Calculate Gratuity
Worked Example
Rules for Private Employees
Eligibility After Resignation
New Rules 2025
FAQ

What is Gratuity?

Gratuity is a lump-sum monetary benefit paid by an employer to an employee as a token of appreciation for the services rendered. It is governed by the Social Security Code 2020 (effective November 21, 2025), which replaced the Payment of Gratuity Act 1972. Gratuity is payable on retirement, resignation, death, or disablement — provided the employee has completed the minimum qualifying service.

Gratuity Formula

Gratuity Calculation Formula Gratuity = (15 / 26) × Last Wages × Years of Service

15 = 15 working days | 26 = Working days in a month (for covered companies)
Last Wages = Basic + DA (must be ≥ 50% of CTC as per Code of Wages 2019)
For companies NOT covered by the Act: use 30 instead of 26

Rule	Old Law	New Law (Nov 2025)
Permanent employee eligibility	5 years	5 years (unchanged)
Fixed-term employee eligibility	Not eligible	1 year (new rule)
Calculation base (wages)	Basic + DA	Wages ≥ 50% of CTC
Cap (private sector)	₹20 lakh	₹20 lakh (unchanged)
Cap (government employees)	₹20 lakh	₹25 lakh
Tax exemption (private)	Up to ₹20L — Sec 10(10)(ii)	Up to ₹20L (unchanged)
Tax exemption (govt)	Fully exempt — Sec 10(10)(i)	Fully exempt (unchanged)

How to Calculate Gratuity in India

Many employees are underpaid gratuity because the wrong wage base is used. Here are the correct four steps:

Check eligibility: Permanent employees need 5 years of continuous service. Fixed-term contract employees need just 1 year under Social Security Code 2020.
Determine the correct wage base: Use Basic + DA. Under Code of Wages 2019, this must be ≥ 50% of CTC. If your employer keeps basic below 50% CTC, gratuity must be calculated on 50% of CTC.
Apply the right formula: Covered companies (10+ employees): (15÷26) × Monthly Wages × Years. Non-covered: (15÷30) × Monthly Wages × Years.
Apply the statutory cap: ₹20 lakh for private sector, ₹25 lakh for central government employees.

Gratuity Calculation — Worked Example

📘 Private employee — ₹60,000/month basic, 8 years service, covered company

Last Drawn Basic + DA	₹60,000/month
Years of Service	8 years
Formula	(15 ÷ 26) × 60,000 × 8
Gratuity Payable	₹2,76,923
Tax Status	100% tax-free (below ₹20L cap)

Gratuity Rules for Private Sector Employees

Minimum service: 5 years for permanent roles. Fixed-term workers qualify after 1 year — a major change under Social Security Code 2020.
Wage base protection: Code of Wages 2019 mandates Basic + DA ≥ 50% of CTC. Employers who artificially kept basic low to reduce gratuity liability are now legally non-compliant.
Cap: ₹20 lakh maximum. Amounts above ₹20L are taxable as salary income at your slab rate.
Tax exemption: Up to ₹20 lakh exempt under Section 10(10)(ii) of the Income Tax Act.
Payment deadline: Employer must pay within 30 days. Interest accrues on delayed payments.

Gratuity Eligibility After Resignation

Yes — gratuity is payable even on voluntary resignation after completing qualifying service. Gratuity is triggered by:

Voluntary resignation after 5 years (permanent) or 1 year (fixed-term)
Superannuation or retirement
Death or permanent disability — no minimum service required
Retrenchment or layoff

If your employer refuses payment, file a complaint with the Labour Commissioner under Section 8 of the Social Security Code. The employer is liable to pay gratuity plus compound interest on the delay.

Frequently Asked Questions

Am I eligible for gratuity if I resign before 5 years?+

For permanent employees, the minimum qualifying service is 5 years. However, under the Social Security Code 2020, fixed-term employees are eligible after just 1 year of service. Also, if an employee dies or becomes permanently disabled, gratuity is payable regardless of the years of service. Some employers voluntarily pay gratuity before 5 years as an ex-gratia payment, but they are not legally obligated to.

Is gratuity taxable?+

For government employees (central, state, defence, local authorities): gratuity is fully exempt under Section 10(10)(i) — no tax at all. For private sector employees covered by the Gratuity Act: tax-exempt up to the least of (a) actual gratuity received, (b) ₹20 lakh, or (c) (15/26) × last salary × years of service — under Section 10(10)(ii). Any amount above ₹20L is taxable as salary income. For private sector employees not covered by the Act: exempt up to ₹20L under Section 10(10)(iii).

What is the 4.81% gratuity component in CTC?+

Many employers include gratuity as part of the CTC structure. The 4.81% is derived from the gratuity formula: (15/26) ÷ 12 months = 4.8077% ≈ 4.81% of monthly basic salary. So if your basic is ₹50,000/month, the gratuity accrual is approximately ₹2,404/month or ₹28,846/year, which the employer sets aside (though it is paid only on exit after qualifying service).

Within how many days must gratuity be paid?+

Under the Social Security Code 2020, gratuity must be paid within 30 days from the date it becomes payable. If the employer fails to pay within this period, they are liable to pay simple interest at the rate notified by the Central Government from the due date until actual payment. The employer must acknowledge the gratuity application within 15 days and determine the amount within 30 days.

📋 Disclaimer & Source: All data and calculations on this page are for informational purposes only and do not constitute financial advice. Rate data sourced from Ministry of Finance, Government of India and RBI notifications. Last reviewed: April 15, 2026. Consult a SEBI-registered advisor before investing. · Full Disclaimer

Gratuity Calculator