How Gratuity Is Calculated in India (15/26 Formula)
By BizToolsIndia Editorial Team · Updated · Salary & HR Calculators
Quick answer
For employers covered by the Payment of Gratuity Act, gratuity = 15 × last drawn (basic + DA) × years of service ÷ 26, where a final part-year of more than six months counts as a full year. It's generally payable after 5 years of continuous service (1 year for fixed-term employees) and is capped at ₹20,00,000 under the Act.
Skip the maths — use the Gratuity Calculator →
The formula
Covered: Gratuity = 15 × (Basic + DA) × Years ÷ 26
Not covered: Gratuity = 15 × (Basic + DA) × Completed years ÷ 30
The 15 is fifteen days' wages for each year of service; 26 is the number of working days in a month. Only basic salary and dearness allowance count — not HRA, special allowance or bonus.
Worked examples
| Basic + DA | Service | Years counted | Gratuity |
|---|---|---|---|
| ₹50,000 | 10 years 7 months (covered) | 11 | ₹3,17,308 |
| ₹50,000 | 10 years 6 months (covered) | 10 | ₹2,88,462 |
| ₹50,000 | 10 years 11 months (not covered) | 10 | ₹2,50,000 |
| ₹40,000 | 1 year (fixed-term, covered) | 1 | ₹23,077 |
Check your own figure with the Gratuity Calculator.
Eligibility
- Continuous service of at least 5 years for permanent employees, except on death or disablement.
- Fixed-term employees qualify after 1 year of continuous service (Code on Social Security, in force from 21 November 2025).
- Payable on resignation, retirement, superannuation, death or disablement.
- Under the labour codes, if allowances exceed half of total pay, the excess is added back so gratuity is calculated on at least 50% of total pay.
More worked examples
| Last basic + DA | Service | Years counted | Gratuity |
|---|---|---|---|
| ₹25,000 | 5 years | 5 | ₹72,115 |
| ₹40,000 | 7 years 8 months | 8 | ₹1,84,615 |
| ₹60,000 | 15 years 3 months | 15 | ₹5,19,231 |
| ₹80,000 | 25 years | 25 | ₹11,53,846 |
| ₹1,50,000 | 30 years | 30 | ₹25,96,154 → capped at ₹20,00,000 |
In the second row, 8 months is more than six, so it counts as a full year. In the last row, the formula gives more than the statutory ceiling, so the amount payable under the law is capped. An employer may pay more under its own policy.
Employers not covered by the law
Where an employer isn't covered and pays gratuity under its own policy, a common approach is half a month's salary for each completed year, using 30 days in a month and ignoring part-years. For ₹40,000 and 7 years 8 months, that is 15 × 40,000 × 7 ÷ 30 = ₹1,40,000 — noticeably less than ₹1,84,615 under the covered formula.
What changed under the labour codes
From 21 November 2025, the Code on Social Security, 2020 governs gratuity. The formula and the ceiling are unchanged, but fixed-term employees qualify after one year, and if allowances exceed half of total pay, the excess is added to wages. Read gratuity under the labour codes for examples.
When and how gratuity is paid
- The employer should work out the amount and pay it within 30 days of it becoming payable; delays can attract interest.
- It is paid to the employee, or to the nominee or legal heirs on death.
- Gratuity can be forfeited, wholly or partly, only in specific situations such as termination for certain kinds of misconduct.
- Disputes can be taken to the controlling authority under the law.
Tax on gratuity
For most private-sector employees, gratuity received is exempt from income tax up to ₹20 lakh over a lifetime, subject to conditions; any amount above the exempt limit is taxed as salary. Government employees have separate rules. Check the current provisions before planning around the exemption.
Common mistakes
- Using gross salary instead of basic + DA (unless the 50% wage rule applies).
- Using the first salary instead of the last drawn salary.
- Forgetting that more than six months in the final year counts as a full year for covered employers.
- Assuming contract staff can never get gratuity — fixed-term employees now qualify after one year.
Gratuity in different exit situations
| How employment ends | Minimum service needed | Gratuity payable? |
|---|---|---|
| Resignation | 5 years (1 year for fixed-term employees) | Yes, once eligible |
| Retirement or superannuation | 5 years | Yes |
| Termination or layoff | 5 years (1 year for fixed-term) | Yes, unless forfeited for specified misconduct |
| Death | None | Yes, to the nominee or legal heirs |
| Disablement due to accident or disease | None | Yes |
How employers fund gratuity
Gratuity is a future liability, so many employers set money aside rather than paying it from current cash when someone leaves. Common approaches are a group gratuity scheme with an insurer or a gratuity trust. Either way, the amount you receive is decided by the formula, not by how the employer funded it.
That is also why many companies show about 4.81% of basic as a gratuity line in CTC: each year of service earns 15 ÷ 26 of a month's wages, which spread over 12 months is 4.81% of annual wages. The Gratuity Calculator shows the amount due for any salary and service period.
Step by step
- Find your last drawn monthly basic salary plus dearness allowance from your final payslip.
- If allowances make up more than half of your total pay, raise the wage figure to 50% of total pay (labour-code rule).
- Count your completed years of continuous service, then the months in the final part-year.
- If you work for a covered employer and the extra months exceed six, add one year.
- Multiply: 15 × wages × years ÷ 26.
- Apply the ₹20 lakh ceiling if the result is higher.
What counts as continuous service
Continuous service isn't broken by interruptions such as sickness, accident, authorised leave, lay-off, a strike that isn't illegal, a lockout, or a stoppage of work that isn't the employee's fault. So a period of approved medical leave, for example, still counts towards the qualifying service. Resigning and rejoining the same employer generally starts a new period of service unless the employer agrees otherwise.
Frequently asked questions
Is gratuity part of CTC?
Many employers include a gratuity provision of about 4.81% of basic in CTC. It isn't paid monthly; it's paid when you leave after becoming eligible.
Is gratuity taxable?
Gratuity is exempt from income tax up to limits set in the Income-tax law, with different rules for government and private employees. Check the current limit before planning around it.
Is gratuity calculated on CTC?
No. It is calculated on last drawn basic salary plus dearness allowance, adjusted under the labour codes if allowances exceed half of total pay.
Does notice period count towards gratuity service?
Service during the notice period is usually counted as continuous service, since you remain employed until your last working day.
Can my employer pay more than ₹20 lakh?
Yes. ₹20 lakh is the ceiling under the law, but an employer can pay more under its own policy or contract. Tax exemption limits apply separately.
Is gratuity paid if I'm terminated?
Yes, if you meet the service condition. It can be withheld or reduced only in specific cases of misconduct set out in the law.
Why is gratuity divided by 26 and not 30?
The law treats a month as 26 working days, excluding four weekly holidays. Dividing by 26 gives a higher daily wage — and a higher gratuity — than dividing by 30.
Is dearness allowance included in gratuity wages?
Yes. Gratuity is calculated on basic salary plus dearness allowance, and under the labour codes on a wider wage base if allowances exceed half of pay.
Is gratuity paid with the full and final settlement?
Usually it is paid along with or shortly after the full and final settlement. It should be paid within 30 days of becoming payable; ask HR for the calculation sheet and check it with the Gratuity Calculator.