Gratuity Calculation in India 2026: Formula, Calculator and the New Labour Code Rules

Gratuity calculation in India follows one formula: last drawn monthly wages × 15 ÷ 26 × years of service, capped at ₹20 lakh. Section 53 of the Code on Social Security, 2020 sets it out. The Code has governed gratuity since the four Labour Codes took effect on 21 November 2025.

Most guides still get two things wrong. They use the old wage base of basic pay plus DA. And they tell fixed-term staff to wait five years.

Both changed. Allowances above half of total pay now count as wages, and fixed-term employees qualify after one year.

So this guide gives you the formula, a free gratuity calculator built on the 2026 rules and worked examples in rupees. It also covers the tax treatment and the employer duties most teams miss.

How Do You Calculate Gratuity in India in 2026?

Multiply last drawn monthly wages by 15, divide by 26, then multiply by years of service. Count a final part-year above six months as a full year, and stop at ₹20 lakh.

That is the whole gratuity formula. The hard part is the inputs: which pay counts as wages, and how many years you count.

What Is the Gratuity Formula Under the Code on Social Security?

Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service. Explanation 3 to Section 53 fixes this for monthly-paid staff: divide the monthly rate by 26 and multiply by 15.

Let’s say a Pune developer leaves after 6 years and 7 months. Her last monthly wages are ₹50,000. Here is the arithmetic:

So one year of service costs you a little over half a month’s wages. Precisely 57.7%.

Why Do You Divide by 26 and Not 30?

Because the Code treats a month as 26 working days. Leave out the four weekly offs. That leaves 26.

Dividing by 26 gives a higher daily rate than dividing by 30, so the statutory figure always beats a rough “half a month’s pay” estimate by about 15%. Small gap. Real money.

How Do You Count Years of Service and Part Years?

Count every completed year, then add one more if the final part-year runs past six months. Section 53(2) pays gratuity “for every completed year of service or part thereof in excess of six months”.

So 6 years and 7 months counts as 7. But 6 years and 6 months counts as 6, which means a single day on the exit date can move the payout by ₹28,846 in the example above. Check exit dates.

How Do You Use the Gratuity Calculator?

Enter last drawn basic pay plus DA, total monthly pay, service and the reason for leaving. The calculator applies the 50% wage rule, the six-month rounding, pro rata pay for fixed-term and deceased employees, and the ₹20 lakh cap.

Treat the result as a planning estimate. A contract, award or settlement can give an employee more, and a dispute over service dates can change the years counted. Keep the records.

Who Is Eligible for Gratuity Under the New Labour Codes?

An employee qualifies on leaving after five years of continuous service with an establishment that has 10 or more employees. Fixed-term staff qualify after one year. The minimum service rule does not apply on death or disablement.

Here is how each case works under the Code on Social Security:

Which Employers Must Pay Gratuity?

Every shop or establishment with 10 or more employees on any day of the preceding 12 months. The First Schedule to the Code also covers every factory, mine, oilfield, plantation, port and railway company, whatever its size.

The test looks back a full year. So a startup that touched 10 employees for a single day last quarter is covered now, even if it has only eight people on payroll today.

When Do Permanent Employees Qualify?

After five years of continuous service, on superannuation, retirement or resignation. Resignation counts. Many founders assume otherwise.

Continuous service includes periods broken by sickness, accident, leave, lay-off or a strike that is not the employee’s fault. Approved absence such as maternity leave stays inside it too. So a long medical leave does not reset the clock.

When Do Fixed-Term Employees Qualify?

After one year of continuous service. The government’s 21 November 2025 release put it plainly: “Gratuity eligibility after just one year, instead of five.”

The Code itself drops the five-year condition when a fixed-term employment contract expires. Section 2(34) adds that fixed-term staff get every benefit a permanent employee gets, in proportion to their service.

Do 4 Years and 240 Days Count as Five Years?

Not automatically. The 240-day and 190-day tests decide whether a year counts as continuous service, but they don’t promise a payout at 4 years and 240 days.

Some court rulings under the old Act have been read that way. Others haven’t. Aditya Birla Sun Life’s 2026 guide warns against treating it as a nationwide right. So take advice before you refuse a borderline claim, and keep attendance records that prove the days.

Is Gratuity Payable on Death or Disablement Before Five Years?

Yes. The five-year rule falls away on death or disablement. On death, you pay the nominee, or the legal heirs if there is no nomination.

For a deceased employee, Section 53(2) also switches the calculation to pro rata. An employee on ₹40,000 wages who dies after 3 years and 2 months leaves ₹73,077 for the family.

Which Wages Count for Gratuity After the 50% Rule?

Basic pay, dearness allowance and retaining allowance, plus any excluded allowances above half of total pay. HRA, conveyance, overtime and commission sit outside wages until they cross that 50% line.

This is the 50% wage rule. It changes most gratuity bills. If your India offers run a low basic salary with a large special allowance, your liability has already gone up.

What Does the 50% Wage Rule Add Back?

Everything excluded above half of total remuneration. Section 2(88) of the Code lists the exclusions, then adds back the amount by which they exceed one-half.

The exclusions that matter most for salaried staff are these:

• House rent allowance: HRA sits outside wages, up to the 50% line.
• Conveyance and travel: conveyance allowance and travelling concessions.
• Employer PF and pension contributions: your own contributions, with interest.
• Overtime and commission: both excluded, then tested against the 50% line.
• Bonus under law: statutory bonus that is not part of contractual pay.

How Much Does the 50% Rule Raise a Gratuity Payout?

Often by a third or more. Take an employee on ₹1 lakh a month with a basic plus DA of ₹35,000 and ₹65,000 in allowances, leaving after 10 years.

The allowances exceed half of total pay by ₹15,000. So wages for gratuity become ₹50,000, not ₹35,000.

Hence the fix most employers chose: restructure the salary structure so basic plus DA is at least half of pay. That does not cut gratuity. It makes the bill predictable, because there is nothing left to add back and nothing for an auditor or a departing employee to argue about later.

How Do You Calculate Gratuity for Fixed-Term Employees?

Use the same 15 ÷ 26 formula, but pay pro rata for the exact service. A fixed-term analyst on ₹60,000 wages who leaves after 2 years and 4 months gets about ₹80,769.

Section 53(2) says that “in the case of an employee employed on fixed term employment” the employer “shall pay gratuity on pro rata basis.” So you don’t round to whole years. You multiply by the actual service.

What Happens if a Fixed-Term Contract Ends Before One Year?

The government’s position is that eligibility starts at one year. But the Code’s Section 2(34) promises proportionate benefits “even if his period of employment does not extend to the required qualifying period”.

That gap has not been settled in the rules yet. So for a contract that ends at 10 or 11 months, take advice before you pay nothing. The amount is small. The dispute isn’t.

Why Does Fixed-Term Gratuity Change Your Hiring Budget?

Because every fixed-term hire now carries a gratuity cost from the first month. A one-year contract on ₹45,000 wages ends with a ₹25,962 gratuity payment.

Before November 2025, most fixed-term contracts never reached five years, so gratuity rarely arose. Now it does. Budget it in the offer, alongside the other employer contributions in India.

How Much Gratuity Will You Pay at Common Salaries?

About 57.7% of one month’s wages for every year of service. An employee on ₹50,000 wages who leaves after 10 years receives ₹2,88,462.

Here is the full grid at four wage levels, capped where it applies:

What Does Five Years Cost on ₹50,000 Wages?

₹1,44,231. That is ₹28,846 for each of the five years, paid in one lump sum within 30 days of the exit.

Now picture it landing in the same month as a notice-period buyout, a final salary and leave encashment for the same person. Cash flow takes the hit. That is why the monthly provision below matters.

At What Salary Does the ₹20 Lakh Ceiling Bite?

Earlier than most people think, for long-serving staff. At 20 years of service, the cap applies once monthly wages pass ₹1,73,333.

What Is the Maximum Gratuity Limit in India?

₹20 lakh. The statutory ceiling has stood at that level since 29 March 2018, when the Labour Ministry raised it from ₹10 lakh.

Section 53(3) of the Code lets the Central Government notify the ceiling. It has not notified a new figure, so ₹20 lakh still applies in November 2026.

Can You Pay More Than ₹20 Lakh?

Yes. Section 53(5) protects an employee’s right to “better terms of gratuity under any award or agreement or contract with the employer.”

So the ceiling caps what the law forces you to pay, not what you may pay. But any amount above the tax-free limit is taxed in the employee’s hands.

Does the Ceiling Differ for Government Employees?

Yes, because they sit outside this Chapter. Central government employees have had a ₹25 lakh limit since January 2024, as Upstox’s guide to the Code’s gratuity rules notes.

Explanation 1 to Section 53 excludes anyone holding a government post governed by other gratuity rules. For your private-sector India team, the figure is ₹20 lakh.

When Must You Pay Gratuity and What Happens if You Pay Late?

Within 30 days of the date gratuity becomes payable. Pay late and you owe simple interest from the due date until the day you pay.

Section 56 of the Code sets the sequence:

1. The employee, or someone authorised in writing, applies to you for payment.
2. You work out the amount and give written notice to the employee and the competent authority, whether or not they applied.
3. You pay within 30 days of the date gratuity became payable.
4. If you pay late, you add simple interest at a rate capped by the Central Government.
5. If the amount is disputed, you deposit the amount you admit with the competent authority, which decides the rest.

In practice, gratuity travels with the full and final settlement. But it runs on its own 30-day clock, so build both into your employee offboarding process.

Can You Forfeit Gratuity?

Rarely. You can forfeit it to the extent of damage or loss if you terminate someone for wilful damage or negligence that harmed your property.

You can forfeit it wholly or partly for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment. Poor performance is not one of them. Read our guide to termination of employment in India before you rely on this.

Who Receives Gratuity if an Employee Dies?

The nominee, or the legal heirs if no nomination exists. A minor’s share goes to the competent authority, which invests it until the minor turns 18.

Every employee who has completed one year of service must make a nomination. So collect nomination forms at the one-year mark. Not at exit.

How Is Gratuity Taxed in India in 2026?

Gratuity is taxed as salary, but up to ₹20 lakh is tax-free for a private-sector employee across a whole career. Government employees get a full exemption.

The Income Tax Department confirms that the exemption limit rose from ₹10 lakh to ₹20 lakh through S.O. 1420(E) of 29 March 2018. The same treatment carries into the Income-tax Act, 2025, in force since 1 April 2026.

How Much Gratuity Is Tax-Free?

The lowest of three amounts: the gratuity actually received, ₹20 lakh, or 15 ÷ 26 of last drawn salary × years of service. TaxClue’s guide to the 2025 Act sets out the same three-way test.

The ₹20 lakh is a lifetime limit, not a per-employer one. So an employee who claimed ₹8 lakh at a previous job has ₹12 lakh of exemption left with you.

Why Can a Labour Code Gratuity Become Partly Taxable?

Because the tax test still uses basic plus DA, while the payout now uses the wider Code wages. Business Today flagged this gap in April 2026.

Suppose a manager leaves after 18 years. Code wages are ₹1,50,000 a month, but basic plus DA is ₹1,20,000.

So the payout sits well below ₹20 lakh, yet ₹3.1 lakh of it is taxed. Tell senior leavers this before the full and final settlement lands, not after. It saves an awkward call.

Do You Deduct TDS on Gratuity?

Only on the taxable part. You add it to the employee’s salary income for the year and deduct TDS on salary at slab rates, under whichever tax regime the employee chose.

Interest on late gratuity is different. Aditya Birla Sun Life’s TDS guide notes that it is taxed as income from other sources, not as salary.

Is There Tax Relief on a Large Gratuity?

Yes. Section 157 of the Income-tax Act, 2025 spreads the tax back over earlier years, so one lump sum does not jump a bracket.

Where service is five to 15 years, the gratuity is notionally split over the two preceding years. At 15 years or more, it is split over three, as India Briefing’s 2026 guide explains.

How Should You Budget and Fund Gratuity Every Month?

Provide about 4.81% of monthly wages from the first month, because 15 ÷ 26 spread over 12 months is 4.81%. Then insure or fund the liability, as Section 57 requires once notified.

On ₹50,000 wages, the provision is ₹2,404 a month. Over five years that builds to the ₹1,44,231 you will owe.

Why Is 4.81% the Right Monthly Provision?

Because one year of service costs 15 ÷ 26 of a month’s wages, and 15 ÷ 26 ÷ 12 is 4.81%. Provide that every month and the liability is always covered on paper. No surprises.

Skip it, and a five-year resignation becomes one large, unbudgeted bill. Our guide to employee benefits in India shows where gratuity sits beside PF, ESI and insurance.

Do You Need Gratuity Insurance or a Gratuity Fund?

Yes, from the date your government notifies. Section 57 of the Code requires every private employer to insure its gratuity liability with an IRDAI-regulated insurer.

Employers with an approved gratuity fund can be exempted, as can employers with 500 or more staff who set one up. You also register the establishment with the competent authority. Check your state’s notification before you assume the date has not arrived.

Should Gratuity Sit Inside CTC?

Your call. But show it as its own line. Many Indian offers include gratuity in cost to company, which is fine if the candidate can see it.

What causes trouble is a CTC that hides it. A candidate who learns at exit that 4.81% of wages was “theirs” all along will not thank you. Put it in the offer, at the right wage base.

What Gratuity Mistakes Do Employers Still Make?

Five repeat across India payrolls. Old wage base, wrong rounding, forgotten fixed-term staff, missed deadlines and a per-employer tax limit.

• Using basic plus DA only: the Code adds back allowances above 50% of pay, so the old base underpays.
• Rounding every part-year up: only a part-year above six months rounds up, and fixed-term service is pro rata.
• Ignoring fixed-term staff: they qualify after one year, so every contract renewal adds to the liability.
• Missing the 30-day window: interest runs from the day gratuity became payable, not from when you noticed.
• Treating ₹20 lakh as per employer: the tax-free limit is lifetime, so ask senior hires what they claimed before.

The India Labour Codes 2026 guide covers the wider changes behind each of these.

How Does Remunance Handle Gratuity for Your India Team?

Remunance provides for gratuity every month, passes it through at cost and pays it on exit inside the 30-day window. Our founding team has run payroll and hiring in India for 22+ years, first as Remunance Systems, which was later acquired by ADP.

As the best EOR in India for teams that want statutory costs done right, we employ your people on our own PF, ESI, professional tax and TAN registrations. Every payslip uses the Code’s wage definition, so gratuity, PF and leave encashment sit on the right base from the first month.

We have hired 1,200+ employees for clients across 34 Indian cities. Corporate Connect named us India’s Best EOR Service Provider 2024.

Our Employer of Record services start at USD 99 a month per employee, capped at USD 249, as our EOR pricing page shows. Salary and statutory costs, gratuity included, appear line by line on one monthly invoice.

We recruit at 9% of CTC and send offers the same working day. When you move to your own entity, our EOR-to-entity transfer agrees service history up front, so years on our payroll keep counting towards gratuity.

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