Gratuity

What Is Gratuity? Meaning, Calculation, Eligibility and Tax Rules

Gratuity is a lumpsum amount an employer pays an employee when employment ends, as a reward for continuous service. Since 21 November 2025, it has been governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. Below: who is eligible, the formula with a calculator and examples, tax, and payment rules. 

Quick answer: What is gratuity? Gratuity is a one-time payment an employer makes to an employee on retirement, resignation, death, disablement or the end of a fixed-term contract. It is generally payable after five years of continuous service (one year for fixed-term employees) and is calculated as 15 days’ wages for each completed year of service, up to a statutory ceiling of ₹20 lakh. 

What Is the Meaning of Gratuity? 

In simple terms, gratuity is a thank-you for long service, paid in one go when you leave. Unlike salary, it is not paid monthly, and unlike a bonus, it is not linked to performance. The amount depends on your last-drawn wages and how many years you have worked for the employer. 

Gratuity is one of the main exit and retirement benefits in India, alongside the Provident Fund (PF) and, where applicable, pension. 

What Is Gratuity in Salary? 

Gratuity in salary refers to the gratuity component an employer sets aside for you while you work. You do not receive it monthly, and it does not appear as earnings on your payslip. It is paid only when you become eligible and leave. 

Is Gratuity Part of CTC? 

Often, yes. Many employers show a gratuity line in the CTC breakdown, commonly about 4.81% of basic salary (15/26 ÷ 12). That line is the employer’s yearly cost or provision, not the money you receive each year. What you actually get at exit is working out using the statutory formula on your last-drawn wages, and only if you meet the eligibility conditions. 

Who Is Eligible for Gratuity in India? 

Gratuity applies to establishments with ten or more employees. Eligibility then depends on your type of employment, length of service, and how your employment ends. 

Situation	Eligible for gratuity?
Permanent employee, five or more years of continuous service	Yes, on retirement, resignation or termination
Fixed-term employee, one year or more under the contract	Yes, pro rata for the period served
Death or disablement due to accident or disease	Yes, even before five years
Permanent employee leaving before five years	Generally, no
Contract worker engaged through a contractor	Yes, paid by the contractor after five years

Gratuity Eligibility for Permanent Employees 

A permanent employee qualifies after five years of continuous service with the same employer, on superannuation, retirement, resignation or termination.  

Continuous service includes approved leave, sickness, and other authorized breaks. An employee is also generally treated as having worked a full year if they worked at least 240 days in it (190 days for underground mines). 

Is Gratuity Payable After 5 Years of Service? 

Yes. Five years of continuous service is the standard qualifying period for permanent employees. Some High Courts have held that four years plus 240 working days in the fifth year can count as five years, but this is not uniformly applied. If you are close to the threshold, check with HR before deciding your last working day. 

Are Fixed-Term Employees Eligible for Gratuity? 

Yes, and this is the biggest change under the new labor codes. The Ministry of Labour and Employment states that a fixed-term employee becomes eligible for gratuity after one year of service under the contract (Ministry of Labour and Employment, Additional FAQs, March 2026). Gratuity is paid pro rata for the period served. Whether back-to-back renewed contracts add up to one year is not addressed in the FAQs. 

Is Gratuity Payable After Resignation, Retirement or Termination? 

Yes, once you meet the service requirements. The reason for leaving does not change the formula. The exception is termination for specific misconduct, where gratuity can be forfeited in whole or part. 

Is Gratuity Payable in Case of Death or Disablement? 

Yes. The five-year requirement does not apply if employment ends because of death or disablement due to accident or disease. In case of death, gratuity is paid to the nominee or, if there is no nominee, to the legal heirs. 

Does Gratuity Apply to Contractual Employees? 

It depends on who employs you. If you are engaged through a contractor, the Ministry’s FAQs say the contractor, as your employer, pays gratuity after five years of continuous service. If you are directly employed on a fixed-term contract, the one-year rule above applies. 

How Is Gratuity Calculated in India? 

Gratuity is 15 days’ wages for every completed year of service, based on your last-drawn monthly wages. The formula itself did not change under the new labour codes; what changed is the definition of “wages” it uses. 

What Is the Gratuity Formula? 

Gratuity = Last-drawn monthly wages × 15/26 × Years of service 

• Why 15/26? A month is treated as 26 working days, so 15/26 of a month’s wages equals 15 days’ wages. 

• Years of service are completed for years, with the rounding rule explained below. 

• For seasonal establishments, gratuity is seven days’ wages for each season; for piece-rated workers, wages are averaged over the last three months. 

For a step-by-step walkthrough, see Taggd’s guide on how to calculate gratuity. 

What Salary Components Are Included in Gratuity Calculation? 

Gratuity uses “wages” as defined in the Code on Wages, 2019. Wages include basic pay, dearness allowance, and retaining allowance. Several components are excluded, such as house rent allowance, conveyance allowance, the employer’s PF contribution, overtime, and bonus. 

There is one important rule on top: if the excluded components add up to more than 50% of your total remuneration, the amount above 50% is added back to wages. 

Example (illustrative): assume an employee’s total monthly remuneration is ₹1,00,000, of which basic pay and DA are ₹35,000. Assume the remaining ₹65,000 consists entirely of components that fall within the statutory exclusions, such as HRA and conveyance allowance. Excluded components can count for at most ₹50,000 (50% of total remuneration), so the extra ₹15,000 is added back. Wages for gratuity become ₹50,000, not ₹35,000. 

The example only works if every one of those components genuinely qualifies as an exclusion under the Code on Wages. A payment is not excluded just because it is called an “allowance”; a general special allowance, for instance, may count as wages. Check how your employer classifies each component. 

Does the New Wage Rule Apply to Service Before November 2025? 

The Ministry of Labour and Employment’s stated position is that when gratuity becomes payable on or after 21 November 2025, it is paid on the rate of wages last drawn at the time of retirement, resignation or death, as per the Code on Social Security (Ministry FAQs, March 2026). The FAQs do not explicitly address whether service before that date should be valued differently, and they are administrative guidance rather than a rule or a court ruling. If you have long service before November 2025, ask your employer how it is applying this. 

How Are Additional Months of Service Counted? 

Once you are eligible, any part of a year above six months is counted as a full year. Six months or less is ignored. 

• 7 years 8 months = 8 years 

• 7 years 4 months = 7 years 

• 7 years 6 months = 7 years 

Gratuity Calculation Examples 

All figures are illustrative and rounded to the nearest rupee. 

How much is five years’ gratuity? About 2.9 months of your last-drawn wages (15/26 × 5). On wages of ₹40,000, that is roughly ₹1.15 lakh. 

Example	Last-drawn monthly wages	Service counted	Calculation	Gratuity
Five years’ service	₹40,000	5 years	40,000 × 15/26 × 5	₹1,15,385
Ten years’ service	₹60,000	10 years	60,000 × 15/26 × 10	₹3,46,154
Extra months (7 years 8 months)	₹50,000	8 years	50,000 × 15/26 × 8	₹2,30,769
Extra months (7 years 4 months)	₹50,000	7 years	50,000 × 15/26 × 7	₹2,01,923

Fixed-term employees 

The Code says fixed-term employees are paid gratuity on a pro rata basis. How a part-year is treated for a fixed-term employee has not been spelled out in the Ministry’s FAQs, so two readings are possible. For an 18-month contract on monthly wages of ₹40,000: 

Reading	Service counted	Gratuity
Proportionate to the exact period served	1.5 years	₹34,615
Completed years, with part-years above six months rounded up	1 year (the six months are not “in excess of six months”)	₹23,077

Until this is settled, check your contract and how your employer applies to the rule. 

What Is the Maximum Gratuity Amount? 

The maximum gratuity an employer must pay under the law is ₹20 lakh. Section 53 of the Code on Social Security, 2020 lets the Central Government notify this ceiling; ₹20 lakh is the amount notified in 2018 under the previous law (S.O. 1420(E)), and no new amount had been notified under the Code at the time of writing. An employer can pay more under a contract, agreement or company policy. 

This payment ceiling is a labour-law limit. It is separate from the income-tax exemption limit covered below, even though both are currently ₹20 lakh for most private-sector employees. 

Is Gratuity Taxable in India? 

Gratuity received on leaving a job is tax-free up to a limit, and only the excess is taxed. The exemption depends on the type of employer, not on whether you choose the old or new tax regime: it is available under both. 

How Much Gratuity Is Tax-Free? 

Two different limits apply to gratuity, and they are easy to confuse: 

• The statutory payment ceiling (labour law) caps how much gratuity an employer must pay: ₹20 lakh. 

• The income-tax exemption limit (tax law) caps how much of the gratuity you receive is tax-free. It depends on your employer category, as below. 

Employee category	Tax-free amount (as commonly applied for tax year 2026–27)
Central or state government and local authority employees	Fully exempt
Other employees covered by the gratuity law	Lowest of: actual gratuity received; ₹20 lakh; 15 days’ last-drawn wages for each completed year of service
Employees not covered by the gratuity law	Lowest of: actual gratuity received; ₹20 lakh; half a month’s average salary for each completed year of service

For non-government employees, the ₹20 lakh tax limit applies across your whole working life. If you have received tax-free gratuity from an earlier employer, that amount reduces the limit available later.  

Gratuity received while still in service, rather than on leaving, is generally fully taxable. Employees of public sector undertakings and similar bodies are usually treated as non-government employees for this purpose. 

You may also see a ₹25 lakh figure quoted for central government employees; that is a payment ceiling under government service rules, not the income-tax limit. 

How Is Gratuity Tax Calculated? 

Work out the exempt amount using the rules above; the rest is added to your salary income and taxed at your slab rate. 

Example: a private-sector employee receives ₹25 lakh of gratuity, and their formula amount is also ₹25 lakh. The exempt amount is the lowest of ₹25 lakh, ₹20 lakh, and ₹25 lakh, so ₹20 lakh is tax-free and ₹5 lakh is taxable. 

From 1 April 2026, the Income-tax Act, 2025 replaced the Income-tax Act, 1961. The gratuity of exemption, previously in Section 10(10) of the old Act, continues under the new Act with new section numbering. Confirm current provisions with your employer’s payroll team or a tax adviser. This section is general information, not tax advice. 

When Is Gratuity Paid? 

Gratuity becomes payable when your employment ends after you meet the eligibility conditions, or on the expiry of a fixed-term contract. 

How Long Does an Employer Have to Pay Gratuity? 

Under Section 56 of the Code on Social Security, 2020, the employer must work out the gratuity due as soon as it becomes payable, notify the employee in writing, and pay it within 30 days, whether or not the employee has applied.  

If payment is late, the employer must pay simple interest from the date it became payable until the date it is paid, at a rate not exceeding the rate the Central Government notifies for long-term deposits. No interest is due only if the delay was the employee’s fault, and the employer obtained written permission from the competent authority. 

Can an Employer Delay or Withhold Gratuity? 

No, not at its own discretion. Gratuity is a statutory right once you are eligible. An employer cannot hold it back for reasons such as a pending notice-period dispute unless the law specifically allows it. If payment is delayed or disputed, raise it in writing with HR first, then approach the authority appointed for gratuity claims in your state. 

Can Gratuity Be Forfeited? 

Only in specific situations set out in the Code on Social Security, 2020, and only if your services are terminated for that reason: 

• Damage or loss to the employer’s property caused by a wilful act or negligence: gratuity can be forfeited up to the amount of the loss. 

• Riotous or disorderly conduct, or violence: gratuity can be forfeited wholly or partly. 

• An offence involving moral turpitude committed in the course of employment: gratuity can be forfeited wholly or partly. 

How to Claim Gratuity From Your Employer 

1. Check eligibility. Confirm your continuous service and how your employment is ending. 

2. Check your wages. Confirm the last-drawn wages your employer will use, including any 50% add-back. 

3. Apply in writing. Section 56 of the Code requires an eligible person to send a written application to the employer in the prescribed form and time. Under the central rules this is generally Form IV, ordinarily within 30 days of gratuity becoming payable; state rules can differ, so ask HR about which form applies. 

4. Update your nomination. Make sure your nominee details are current; nominees claim in case of death. 

5. Track payment. The employer must notify you of the amount and pay within 30 days of it becoming payable. 

6. Escalate if needed. If payment is delayed or the amount is disputed, write to HR, then apply to the competent authority for gratuity in your area. 

What Happens to Gratuity When You Leave a Job? 

How employment ends	Gratuity
Resignation after five years	Payable with full and final settlement
Resignation before five years (permanent employee)	Generally, not payable
Retirement or superannuation	Payable
Termination	Payable if eligible, unless forfeited for the reasons above
End of fixed-term contract after one year or more	Payable pro rata
Death or disablement	Payable regardless of length of service; to the nominee or legal heirs in case of death

Gratuity is not transferable between employers. Each employer pays for the service you gave it. 

Gratuity vs PF vs Pension 

	Gratuity	Provident Fund (EPF)	Pension (EPS)
Who contributes	Employer only	Employee and employer	Employer’s share of PF contribution
How it builds	Calculated at exit from last-drawn wages and service	Monthly contributions plus interest	Monthly contributions to a pension fund
When paid	On leaving, after eligibility	On retirement or withdrawal, subject to rules	Monthly pension after ten years’ service and reaching pension age
Form of payment	Lump sum	Lump sum or partial withdrawals	Monthly pension
Transferable between jobs	No	Yes, via UAN	Yes, via UAN

FAQs 

Plan Exit Benefits With Confidence 

The new labour codes changed how gratuity is calculated for many employees, especially those with low basic pay or on fixed-term contracts.

For more on how pay is structured, see Taggd’s HR Glossary guides.