Quick answer: Gratuity in India is calculated as (15/26) x last drawn basic salary x years of service. You need 5 continuous years to qualify — but the 2025 Labour Code changes cut that to just 1 year for fixed-term employees, and the 50% wage rule means most workers will see 40-70% higher payouts going forward.
What Is Gratuity and When Does It Apply?
Gratuity is a statutory lump-sum payment an employer makes to an employee as recognition for long service. Governed by the Payment of Gratuity Act, 1972, it applies to all organisations with 10 or more employees — covering factories, mines, plantations, ports, railways, and most private-sector shops and establishments across India.
The trigger events for payment are:
- Resignation or termination after 5 or more years of continuous service
- Retirement or superannuation
- Death or permanent disablement — no minimum service period required; payable to the nominee or legal heir immediately
- Fixed-term contract completion of 1 year or more (new rule, effective November 2025)
The Gratuity Formula: The 15/26 Rule
The formula under the Payment of Gratuity Act is the same for all eligible employees:
Gratuity = (15 x Last Drawn Basic Salary x Years of Service) / 26
- 15 = 15 days wages for every completed year of service
- 26 = average working days in a month (excluding weekly offs)
- Last Drawn Basic Salary = Basic Pay + Dearness Allowance at time of exit
Worked Example
Priya has worked at a logistics company in Hyderabad for 8 years. Her last drawn basic salary is Rs.40,000 per month.
Gratuity = (15 x 40,000 x 8) / 26 = Rs.60,00,000 / 26 = Rs.1,84,615
If her tenure included 7 or more months beyond a full year, that fraction rounds up. Anything less than 6 months is ignored.
How Years of Service Are Counted
A fraction of a year beyond 6 months counts as a full year — so 7 years and 8 months = 8 years for gratuity purposes. Maternity leave, authorised sick leave, and reinstatement periods all count toward continuous service. This is especially important for women who may take career breaks — your pre-break service still accumulates.
Eligibility: Who Qualifies in 2026?
Regular Employees — 5-Year Rule
For permanent or indefinite-term employees, 5 years of continuous service remains the threshold. Promotions, internal transfers, and department changes do not reset the clock — continuity is maintained as long as the employer-employee relationship stays unbroken at the same organisation.
Fixed-Term Employees — New 1-Year Rule
The Code on Social Security, 2020 (effective 21 November 2025) introduced a significant change: fixed-term employees are now entitled to pro-rata gratuity after just 1 year of service. Before this, a three-year BPO contract employee left with nothing if the contract was not renewed at the five-year mark. Now they receive proportionate gratuity for every completed year.
This change particularly benefits women in Hyderabad’s BPO, retail, and healthcare sectors where fixed-term contracts are common. It is one of the most meaningful labour law improvements for India’s contractual workforce in the last decade.
Death or Permanent Disablement — No Minimum Service
If an employee dies in service or becomes permanently disabled, gratuity is paid to the nominee or legal heir regardless of years worked. No employer can withhold payment citing the 5-year rule in these situations. File a nomination (Form F under the Act) with your employer the moment you join — do not wait.
The 2026 Labour Code: Why Your Gratuity May Be 40-70% Higher
The biggest financial impact of the new Labour Codes on gratuity comes from the 50% wage rule. Under the old system, many employers structured salaries with basic pay as low as 30-35% of CTC and loaded the rest into allowances. Since gratuity is calculated only on basic pay plus dearness allowance, this artificially suppressed payouts.
The Code on Wages and Code on Social Security now mandate that basic wages must constitute at least 50% of total CTC. If allowances collectively exceed 50% of CTC, the excess gets reclassified as basic wages for statutory calculations — including gratuity, provident fund, and ESI.
Before vs After the Labour Code
| Scenario | Old Rule | New Rule 2026 |
|---|---|---|
| Monthly CTC | Rs.60,000 | Rs.60,000 |
| Basic Pay | Rs.18,000 (30%) | Rs.30,000 (50%) |
| Gratuity calculation base | Rs.18,000 | Rs.30,000 |
| Gratuity after 8 years | approx Rs.83,077 | approx Rs.1,38,462 |
The same tenure now produces 67% more gratuity because the calculation base is higher. Note: some employees will see a reduction in monthly take-home as allowances are reclassified. Read your revised salary structure carefully before signing any new contract.
Gratuity Tax Exemption in India 2026
Section 10(10) of the Income Tax Act provides a gratuity tax exemption, subject to limits that vary by employment type:
| Employment Category | Tax Exemption Limit |
|---|---|
| Central/State Government and PSU employees | Fully exempt — no monetary ceiling |
| Private sector — covered under Gratuity Act | Up to Rs.20 lakh |
| Private sector — NOT covered under Gratuity Act | Least of: Rs.20 lakh / half month salary x years / actual gratuity |
The Rs.20 lakh ceiling for private sector employees has not changed since 2018 when it was doubled from Rs.10 lakh. Any gratuity above Rs.20 lakh is added to your total income and taxed at your applicable slab rate.
Career-long cumulative limit: The Rs.20 lakh exemption is cumulative across your entire career, not per employer. If you received Rs.8 lakh in gratuity from a previous employer and later receive Rs.16 lakh from a new one, only Rs.12 lakh of the second payment is exempt — the Rs.4 lakh excess is taxable.
How to Report Gratuity in Your ITR
Report the full gratuity amount under Income from Salary and then claim the exemption under Section 10(10). TDS on any taxable portion above Rs.20 lakh should already be deducted by your employer before releasing funds. Double-check your Form 16 to confirm the correct amount was deducted — errors do happen when employees cross the cumulative Rs.20 lakh threshold.
When Can an Employer Legally Forfeit Gratuity?
The Payment of Gratuity Act strictly limits the grounds for forfeiture. Many employees are surprised to learn their employer cannot withhold gratuity for most dismissal reasons:
- Full forfeiture permitted only for: termination due to riotous/disorderly conduct, violence, damage or destruction of employer’s property, or acts constituting moral turpitude (as defined under the Act)
- Partial reduction permitted for: other cases of gross misconduct not falling in the above category
- Forfeiture not permitted for: resignation, retirement, non-renewal of contract, or retrenchment — gratuity is fully payable in all these situations
If your employer refuses to pay gratuity without valid legal grounds, file a claim with the Controlling Authority (usually the Labour Commissioner) of your state within the prescribed limitation period. Employers who delay beyond 30 days must also pay interest on the outstanding amount.
Frequently Asked Questions on Gratuity India 2026
Does gratuity come from my salary or is it an extra payment?
Gratuity is entirely the employer’s obligation — it is not deducted from your salary at any point. Most employers fund this liability through group gratuity schemes with insurance providers such as LIC, SBI Life, or private insurers. You do not contribute to it; you simply receive it when you exit.
What is the exact gratuity calculation formula in India 2026?
Gratuity = (15 x Last Drawn Basic Salary x Completed Years of Service) divided by 26. The “15” is 15 days wages per year; the “26” is the standard working days per month under the Act. Use only Basic Pay plus Dearness Allowance in the calculation — HRA, conveyance, and other allowances are excluded.
What is the tax-free limit on gratuity in India in 2026?
For private sector employees covered under the Payment of Gratuity Act, the tax exemption is up to Rs.20 lakh under Section 10(10). Government and PSU employees receive full exemption with no upper limit. This Rs.20 lakh ceiling has not been revised since 2018 and applies cumulatively across your entire career.
Are fixed-term contract workers entitled to gratuity in 2026?
Yes. Under the Code on Social Security 2020 (effective 21 November 2025), fixed-term employees earn pro-rata gratuity after completing 1 year of service with the same employer. This is a significant improvement over the earlier 5-year rule that effectively excluded most contract workers from gratuity benefits.
Can my employer withhold gratuity if I resign?
No — forfeiture on grounds of resignation is not permitted under the Payment of Gratuity Act. Your employer must pay within 30 days of your resignation if you have completed 5 years (or 1 year if you are a fixed-term contract employee under the new rules). Failure to do so attracts interest and legal liability for the employer.
Find Your Next Job — Zero Placement Fees, Always
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Written by Srikanth, Workforce and Compliance Writer at ePeople India. Srikanth covers employee rights, payroll law, and labour compliance across India’s growing workforce.
