Gratuity Calculation: Formula, 5-Year Rule and Worked Examples

What is gratuity?

Gratuity is a lump-sum payment from your employer as a thank-you for long service. It is paid entirely by the employer; it is not cut from your monthly salary, even though some CTC breakups show a “gratuity” line. It becomes payable when you retire, resign, reach superannuation, or on death or disablement.

Gratuity used to be governed by the Payment of Gratuity Act, 1972. Since the labour codes came into force on 21 November 2025, it sits under the Code on Social Security, 2020. The core 15/26 calculation for permanent employees stayed the same. The changes that matter are for fixed-term employees and in how “wages” is defined, both explained below.

The formula

• Basic + DA means basic pay plus dearness allowance. HRA, bonus and special allowances are generally not part of it.
• 26 is the number of working days in a month used by the law, and 15 is the number of days’ wages paid for each year of service.
• Rounding: a part-year of more than six months counts as a full year. Six months or less is ignored.

Worked examples

Case A in full: 50,000 × 15 × 10 ÷ 26 = ₹2,88,461.54, usually written as ₹2,88,462. The amount is under the ₹20 lakh limit, so there is no tax on it.

Cases B and C show why a few months matter. With the same salary, 7 years 8 months is paid as 8 years (₹1,84,615), while 7 years 5 months is paid as 7 years (₹1,61,538), a difference of ₹23,077.

For a quick sense of scale, here is how the same salary grows with service:

The 5-year rule

For permanent employees, gratuity is generally payable after five years of continuous service with the same employer. Two exceptions are well established: the five-year condition does not apply if service ends because of death or disablement.

Is 4 years and 8 months enough?

This is the most common question. Many employers and courts have applied a rule that an employee who has completed 4 years and 240 days (roughly 4 years 8 months) is treated as having completed five years, because 240 days of work in a year counts as a full year of continuous service. Some employers read the rule more strictly, and the number of days can differ depending on the establishment’s working week. Treat this as a common interpretation, not a guarantee, and confirm with your HR team or appointment terms.

New: 1 year for fixed-term employees

Under the Code on Social Security, 2020, in force from 21 November 2025, employees hired on a fixed-term contract become eligible for gratuity on a pro-rata basis after one year of continuous service, instead of waiting for five. The rule applies from the date the code came into force. For example, a fixed-term employee with last Basic + DA of ₹30,000 who completes one year would get 30,000 × 15 × 1 ÷ 26 = ₹17,308.

If your employer is not covered by the law

Some establishments fall outside the statutory scheme. They may still offer gratuity under their own policy. The commonly used formula is (Last drawn salary × 15 × completed years) ÷ 30, using 30 days in a month and counting only fully completed years. For ₹40,000 and 7 completed years that gives ₹1,40,000. Because this depends on your employer’s policy, check your offer letter.

What changed with the wage definition

The new code defines “wages” for gratuity as basic pay, dearness allowance and retaining allowance, and says that these should make up at least 50% of total remuneration, with certain exclusions. Many salary structures had a low basic, sometimes 30–40% of CTC. If an employer re-structures pay to meet the 50% test, the gratuity base can go up.

Illustration, not a promise: suppose total monthly remuneration is ₹80,000 and Basic + DA was ₹32,000. Ten years of service gives ₹1,84,615. If the wage base becomes ₹40,000, the same ten years gives ₹2,30,769, which is ₹46,154 more. How your company treats this, and from when, is something to confirm with HR or payroll.

Tax on gratuity

• For private-sector employees covered by the statutory scheme, gratuity received at retirement, resignation, death or disablement is tax-exempt up to a lifetime limit of ₹20 lakh. Any amount above that is taxed as salary.
• Government employees receive gratuity under their own service rules (such as the CCS Pension Rules for central government staff), and it is generally fully exempt.
• The rules for exemption sit in the Income-tax law and can change with the Budget. Check incometax.gov.in or your tax advisor for the position in your year of receipt.

Common mistakes

• Using CTC or gross salary. The base is Basic + DA only (or the new wage definition where applicable).
• Counting the wrong months. More than six months in the last year rounds up; six or fewer does not.
• Dividing by 30 instead of 26 when the employer is covered by the statutory formula.
• Forgetting the break in service. The five years must generally be continuous with the same employer; service in a merged or transferred company can count if the employer treats it as continuous.
• Assuming it can never be denied. The law allows forfeiture in specific cases, such as termination for wilful damage or for offences involving moral turpitude. This is rare and usually needs a formal process.

Employers are generally expected to pay gratuity within 30 days of it becoming due, and delay can attract interest. If you do not receive it, write to HR first, then approach the controlling authority under the law.

Once you receive gratuity, you may want to use it for a loan prepayment. Our guide on how much interest a home loan prepayment saves shows what a lump sum can do.

Sources and where to verify

• Ministry of Labour and Employment (labour codes and FAQs)
• Press Information Bureau (labour codes announcement, 21 November 2025)
• Income Tax Department (exemption rules)

This guide explains the general rules and is not legal or tax advice. Gratuity depends on your employer’s coverage, your appointment terms and the current law. Please confirm with your HR department or a qualified professional before relying on a figure.