Gratuity Calculation in India: Formula, Eligibility and Worked Examples

Gratuity is the lump sum an employer pays when someone leaves after years of service. It is one of the few payments in Indian payroll that is worked out once, at the end, which is exactly why it catches employers out: the number is only as good as the joining date and wage history you kept for that person.

This guide sets out the rules as they stand under the Code on Social Security, 2020, which replaced the Payment of Gratuity Act when the labour codes came into force in November 2025. To skip straight to a number, use our free gratuity calculator.

Who has to pay gratuity

Every factory, shop, office and other establishment that has employed 10 or more people on any day in the previous 12 months is covered. Once covered, it stays covered even if headcount later falls below ten.

The industry does not matter. A manufacturer, a distributor, a clinic, a software firm and a restaurant chain follow the same rules.

Who is eligible

Situation	Minimum service
Permanent employee who resigns, retires or is let go	5 years of continuous service
Fixed-term employee whose contract ends	1 year
Death or disablement	None

Continuous service means unbroken service. Approved leave, sickness, an accident, a lay-off or a lawful strike do not break it. If an employee dies, the gratuity goes to their nominee, or to their legal heirs if there is no nomination.

The one-year rule for fixed-term staff is the biggest change the code made. Before it, someone on a two-year contract usually walked away with nothing.

The formula

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

Three parts of that need care.

Last drawn wages. Basic pay plus dearness allowance (and retaining allowance, where it exists) for the last month worked. HRA, conveyance, special allowance and bonus are left out, with one exception: if all the excluded allowances together are more than half of total pay, the excess is added back to wages. Our HR and payroll guide explains this 50% rule with a sample salary structure.

15 ÷ 26. Gratuity is 15 days' wages for each year. The law counts a month as 26 working days, so 15 days' wages is the monthly wage multiplied by 15 and divided by 26.

Completed years. A part of a year longer than six months counts as a full year. Seven years and eight months is eight years; seven years and five months is seven.

For piece-rated workers, use the average daily wage over the last three months. Seasonal establishments pay seven days' wages for each season instead of 15 days for each year.

Four worked examples

1. A permanent employee rounding up. Basic plus DA of ₹30,000, service of 7 years 8 months, so 8 years counted.

₹30,000 × 15 ÷ 26 × 8 = ₹1,38,462

2. The same employee, three months earlier. At 7 years 5 months only 7 years count.

₹30,000 × 15 ÷ 26 × 7 = ₹1,21,154

Leaving three months later is worth ₹17,308 to this employee, which is why gratuity questions spike around the six-month mark.

3. A fixed-term employee. Basic plus DA of ₹26,000 on a contract that ends after 2 years 3 months, so 2 years counted.

₹26,000 × 15 ÷ 26 × 2 = ₹30,000

4. A senior employee at the cap. Basic plus DA of ₹3,00,000 after 25 years.

₹3,00,000 × 15 ÷ 26 × 25 = ₹43,26,923, capped at ₹20,00,000

The ₹20 lakh cap

Statutory gratuity stops at ₹20 lakh. An employer can pay more through its own policy or an employment contract, and many do for senior staff, but the extra is a contractual payment, not gratuity under the code.

When gratuity can be withheld

Gratuity can be forfeited, wholly or partly, only in narrow cases: an employee dismissed for causing wilful damage or loss to the employer's property (up to the amount of the loss), for riotous or violent conduct, or for an offence involving moral turpitude committed during employment. Ordinary resignation, notice-period disputes or poor performance are not grounds.

Paying it

• Deadline. Within 30 days of gratuity becoming payable. Late payment carries simple interest.
• Tax. For an employee covered by the gratuity law, the gratuity worked out on the statutory formula is tax-free up to ₹20 lakh across their working life. Anything above that is taxed as salary.
• In the full and final settlement. Show gratuity as its own line, with the wages and years used, so the employee can check it against the formula.

Planning for it every month

Gratuity is a liability that builds up every month, not a surprise at exit. The monthly figure is simple:

Monthly provision ≈ 4.81% of wages (15 ÷ 26 ÷ 12)

On ₹30,000 of basic plus DA that is about ₹1,442 a month. Companies that quote CTC often include this figure, and many fund it through a group gratuity policy with an insurer so a large exit does not hit cash flow in one month.

What to keep on file

Gratuity disputes are almost always about the inputs, not the arithmetic. For every employee, keep:

1. The joining date and any break in service, with the reason.
2. Basic and DA for every month, not just the latest.
3. Whether they are permanent or fixed-term, and the contract end date.
4. A signed nomination.

How Novota HR & Payroll helps

Novota HR & Payroll keeps joining dates, attendance and monthly wages for the whole team in one place, so gratuity is worked out from the same numbers as payroll, PF and ESI. The free PF and ESI calculator and gratuity calculator use the same rules.