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Gratuity is a statutory lump sum that every Indian employer covered by the Payment of Gratuity Act, 1972 must pay when you leave after five or more years of service. The formula is (Basic + DA) × 15 ÷ 26 × years worked. For a private-sector employee earning ₹40,000 in basic plus DA for 10 years, that’s ₹2,30,769 — money you’ve already earned, not a favour your employer is doing you.
Here’s how to calculate it, check your eligibility, understand the 2026 Labour Code changes, and make sure you receive every rupee on time.
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What Is Gratuity?
Gratuity is a statutory end-of-service benefit, not a bonus. If your employer has 10 or more employees at any point in a financial year, they are required by law to maintain a gratuity fund and pay you when you exit — whether through resignation, retirement, superannuation, or retrenchment. Once triggered, it cannot be withheld except in narrowly defined cases of wilful misconduct leading to loss or damage to employer property.
Think of it as deferred wages: for every year you stayed and contributed, the law guarantees you 15 days of your last drawn basic pay.
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Are You Eligible?
The 5-Year Threshold
The baseline rule under the Payment of Gratuity Act: you must complete five continuous years of service with the same employer. “Continuous” here means uninterrupted employment — but the definition of interruption is stricter than most employees realise.
Absences on authorised leave, medical leave, or lay-off periods do not break continuity of service for gratuity purposes. Your service clock keeps running.
When the 5-Year Rule Doesn’t Apply
Two exceptions override the five-year requirement entirely:
1. Death — Your nominee (designated via Form F at the time of joining) receives the gratuity regardless of how many years you had completed.
2. Permanent disablement — If an accident or illness makes you permanently unable to work, gratuity is payable from day one of employment.
In both cases, the payout is calculated on the actual years and months worked, rounded to the nearest full year.
Special Protection for Women: Maternity Leave Does Not Break Service
This matters more than most people realise. Under the Payment of Gratuity Act and now reinforced by the Social Security Code, 2020, maternity leave of up to 26 weeks does not break continuous service for gratuity calculation. Taking your full statutory maternity leave — as is your right under the Maternity Benefit Act — will not reduce or eliminate your gratuity entitlement.
If your employer has ever implied otherwise, they are wrong. An employer cannot count maternity leave as a gap in service.
Fixed-Term and Contract Workers: The 1-Year Rule (Labour Codes 2026)
One of the most significant changes under the four Labour Codes, notified November 2025 and operationalised in 2026: fixed-term employees become eligible for pro-rata gratuity after completing just one year of service, not five.
For gig workers, fixed-term staff, and contract employees — a category that accounts for a growing share of India’s formal workforce — this is a material improvement. Gratuity accrues from the first year, at the same 15/26 formula, calculated on actual service completed.
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How to Calculate Your Gratuity
The 15/26 Formula
Gratuity = (Basic Pay + DA) × 15 ÷ 26 × Years of Service
- 15 = the number of days of wages per year of service the law allocates as gratuity
- 26 = the number of working days in a month (the Act assumes a 4-Sunday month; weekly off days are excluded)
- Years of service = completed years; six months or more in the final year rounds up to a full year
The figure used is your last drawn CTC vs in-hand salary breakdown plus dearness allowance — not your CTC, not HRA, not any allowances beyond DA.
Two Examples
Example 1 — Entry-level employee
– Last drawn Basic + DA: ₹25,000/month
– Years of service: 6 years
– Gratuity = ₹25,000 × 15 ÷ 26 × 6 = ₹86,538
Example 2 — Mid-career professional
– Last drawn Basic + DA: ₹60,000/month
– Years of service: 12 years
– Gratuity = ₹60,000 × 15 ÷ 26 × 12 = ₹4,15,384
In both cases, if the amount exceeds ₹20 lakh, only ₹20 lakh is tax-exempt for private-sector employees (more on that below). The gratuity itself is uncapped — you receive the full calculated amount; the ₹20 lakh limit is about tax treatment, not payout.
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What Changed Under the New Labour Codes 2026
Your Gratuity Base May Be Larger Now
The four Labour Codes introduced a new definition of “wages”: basic + DA must together constitute at least 50% of your total remuneration (CTC). If your employer structures your CTC with allowances exceeding 50%, the excess is treated as wages for statutory calculation purposes.
Under the old regime, many employers kept basic pay at 30–40% of CTC to minimise PF and gratuity contributions. Under the 2026 rules, this structure no longer holds. Analysts estimate private-sector employees under the new wage definition could see 40–70% higher gratuity payouts compared to the same calculation under pre-Labour Code structures — because the base number going into the formula is bigger.
This change is real but its implementation varies by state, since Labour is a concurrent subject. Check with your HR team or a labour law consultant if you are uncertain whether your employer has transitioned to the new wage structure.
What Employers Must Do
Employers with 10+ employees must now:
– Maintain a gratuity trust or subscribe to the LIC Group Gratuity Scheme
– Apply the revised wage definition to gratuity accruals
– Extend gratuity eligibility to all fixed-term staff after one year
If you are a fixed-term employee who was told gratuity does not apply to you, this is worth revisiting with your HR team or an employment lawyer.
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Tax on Gratuity: How Much Do You Keep?
Government Employees
If you work for the central or state government, a local authority, or a statutory body, your entire gratuity is exempt from ITR filing guide under Section 10(10)(i) of the Income Tax Act. There is no ceiling.
Private Sector Employees (Covered by the Payment of Gratuity Act)
Tax exemption under Section 10(10)(ii) applies to the least of:
1. Actual gratuity received
2. ₹20,00,000 (twenty lakh rupees)
3. 15/26 × last drawn salary × completed years
In practice, for most employees earning below ₹80,000/month in basic, the actual gratuity received will be below ₹20 lakh after typical tenures, meaning the entire amount is tax-free. Only high earners with long tenures need to worry about the ₹20 lakh cap, and even then, only the amount above the threshold is taxable as income under your slab.
The ₹20 lakh ceiling has not changed in Budget 2026. Any gratuity above it is included in your gross income and taxed at your applicable slab rate.
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How to Claim Your Gratuity
Step 1: File Form I with Your Employer
Within 30 days of becoming eligible — on your last working day or shortly after — submit Form I (Application for Gratuity by an Employee) to your employer. Most HR systems handle this during full-and-final settlement. If yours does not, request the form explicitly.
Your employer must acknowledge receipt and, within 15 days, either issue a notice specifying the amount payable or reject the claim with written reasons.
Step 2: The 30-Day Payment Window
Once gratuity is determined to be payable, your employer has 30 days from the date it became due to pay it. This is a statutory deadline, not a best-practice guideline.
Step 3: If Your Employer Delays
If the 30-day window passes without payment:
– You are entitled to simple interest at 10% per annum (under Section 7(3A) of the Act) from the due date to the actual payment date.
– You can file an application before the Controlling Authority — typically the Assistant Labour Commissioner in your district — under Section 7(2).
– The Controlling Authority can direct payment of the gratuity plus interest, and impose penalties on the employer for willful non-payment.
Do not accept “we’ll settle it next month” without a written confirmation of the amount. Verbal assurances have no standing before the Controlling Authority.
Don’t Forget Form F (At Joining)
Form F is the nomination form you fill when you join a company — it names who receives your gratuity in the event of your death. If you never filled it, or your nominee details have changed (marriage, death of a nominated parent), update it immediately with your HR. The nomination controls who gets paid without requiring a legal succession process.
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FAQ
Q: I resigned after 4 years and 8 months. Am I eligible for gratuity?
A: Under the Payment of Gratuity Act, 240 working days in the fifth year (about 4 years 8 months for a 6-day work week or 190 days for a 5-day work week) is generally treated as completing five years for gratuity purposes — confirmed by multiple High Court rulings. Some courts have held the threshold at 4 years and 240 days worked in year 5. If your employer denies payment on this ground, you can approach the Assistant Labour Commissioner.
Q: My employer says my HRA and special allowances are not counted in gratuity. Is that right?
A: Under the Payment of Gratuity Act, 1972, the calculation uses Basic + DA only. HRA, transport allowance, and performance bonuses are excluded. However, under the new Labour Codes 2026, if these allowances push your non-wage components above 50% of CTC, the excess is reclassified as wages — which then enters the gratuity base. Check with your HR whether your company has adopted the Labour Code wage definition.
Q: I took 8 months of maternity leave twice. Does that affect my gratuity?
A: No. Under the Payment of Gratuity Act and the Social Security Code, 2020, maternity leave does not break continuous service. Up to 26 weeks per maternity leave is explicitly counted as part of your service for gratuity purposes. Two maternity breaks do not reduce your eligibility or the total years counted.
Q: Can my employer reduce my gratuity for poor performance?
A: Only if there has been a formal finding of wilful misconduct causing loss or damage to employer property under Section 4(6) of the Act. Poor performance ratings, a bad appraisal cycle, or “attitude issues” are not valid grounds. If your employer withholds or reduces gratuity citing performance, that is likely unlawful — file before the Controlling Authority.
Q: I am a gig platform worker. Do I get gratuity?
A: The Social Security Code, 2020 includes a separate chapter on social security for gig and platform workers, but the notified rules as of mid-2026 still require state-level implementation and scheme notifications before gig workers receive gratuity. The situation is evolving; check the latest notification from your state’s Labour Department.
Q: What is the maximum gratuity I can receive?
A: There is no statutory ceiling on the gratuity amount you can receive. The ₹20 lakh figure is a tax exemption limit, not a payout cap. If your calculated gratuity is ₹35 lakh, you receive ₹35 lakh — but ₹15 lakh of it is taxable income.
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Know Your Rights — and Your Gratuity Number
Gratuity is not complicated once you understand the formula. More importantly, it is non-negotiable: your employer cannot opt out of paying it, cannot condition it on a “good exit,” and cannot make you wait indefinitely. If you are close to five years at your current employer or are a fixed-term employee who has crossed one year, run the 15/26 calculation now and know what you are owed before you hand in your resignation.
At ePeople India, we work with employers who believe employees should leave with their full entitlements intact — not chase them for months. If you are looking for employers with transparent HR policies and zero recruitment fees for candidates, [browse our job listings](#) or [let us help you find the right hire](#).
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Internal links:
– [PF Withdrawal in India 2026: EPFO 3.0 Rules, Process & Tax](/pf-withdrawal-india-2026-epfo-rules-process-tax) — companion piece on EPFO claims
– [Minimum Wages in India 2026: State-Wise Rates & Your Rights](/minimum-wages-india-2026-state-wise-rates-legal-rights) — companion piece on wage floors
– [Maternity Leave in India 2026: 26 Weeks Pay & Job Protection](/maternity-leave-india-2026-complete-rights-guide) — for women eligibility context
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DEDUP CHECK
Topics already published / in-draft for EPI:
– EPI_001: zero placement fees
– EPI_002: returnships / career-break
– EPI_003: WFH & remote jobs for women
– EPI_004: (pending topic)
– EPI_007: CTC vs in-hand salary
– EPI_008: notice period rules
– EPI_009: maternity leave
– EPI_011: PF withdrawal / EPFO 3.0
– EPI_013: ITR filing salaried employees
– EPI_014: minimum wages
EPI_015 = Gratuity → DISTINCT from all above. Cluster companion to PF (EPFO) and ITR but covers different legal entitlement.
Distinctiveness vs other 8 sites (all UAE free-zone/business setup / delivery / helpdesk / interior design): CLEAR PASS — no overlap.
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BRAND REVIEW NOTES
✅ Voice: practitioner (employment rights perspective), not AI-assistant
✅ /human directive applied: has real numbers (₹25k example, ₹60k example), specific legal section references (Sec 10(10)(ii), Sec 7(3A), Sec 4(6)), actionable step-by-step
✅ No “In today’s fast-paced world” or filler phrases
✅ Opens with direct 40-60 word answer before expanding
✅ No free-zone editorial rules applied (irrelevant to EPI)
✅ Women’s rights section explicitly covered (maternity leave + gratuity)
✅ Zero-placement-fees / EPI mission reflected in CTA
✅ Internal links: same-site only (EPI posts), no cross-site URLs
✅ Sources: Payment of Gratuity Act 1972, Social Security Code 2020, Section 10(10)(ii) ITA
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WORD COUNT ESTIMATE: ~1,850 words
