- The Code on Social Security replaced the Payment of Gratuity Act, 1972 on 21 November 2025.
- For monthly-paid staff, the formula is last monthly wage ÷ 26 × 15 × years of service.
- A final part-year above six months counts as a full year.
- Gratuity must be paid within 30 days of becoming payable.
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How does gratuity calculation work?
You take last drawn wages, divide by 26 working days, multiply by 15 and then by completed years.
Wages means basic pay, dearness allowance and retaining allowance under the Code’s new definition. If allowances exceed half of total pay, the 50% wage rule adds the excess back into wages. That quietly lifts the gratuity bill on any CTC built with a low basic and a large special allowance.
Let’s say a Pune engineering manager leaves after 8 years and 7 months. Her last monthly basic is ₹80,000. The seven months round up. Nine years.
| Step | Working | Amount |
|---|---|---|
| Daily wage | ₹80,000 ÷ 26 | ₹3,077 |
| 15 days’ wages | ₹3,077 × 15 | ₹46,154 |
| Gratuity for 9 years | ₹46,154 × 9 | ₹4,15,385 |
That sits well inside the ₹20 lakh ceiling. The Labour Ministry confirmed the ceiling in August 2026, while noting that employers remain free to pay more under a contract, award or settlement.
What changed for gratuity for fixed term employees?
They now qualify after one year instead of five, from 21 November 2025, as the PIB release on the Labour Codes confirmed.
So gratuity for fixed term employees is now a cost you must budget from day one. Suppose you hire a fixed-term analyst for two years on a basic of ₹45,000. At the end of the term, you owe ₹51,923. Not optional.
Section 53 of the Code on Social Security also drops the five-year condition on death and disablement.
Most employers provide for gratuity monthly at about 4.81% of wages. Gratuity is also exempt from income tax up to ₹20 lakh for private-sector staff.
Service history matters in an EOR-to-entity transfer too, because a senior engineer with four years on an EOR payroll will expect those years to count towards the five-year threshold at your new entity. Put it in writing.
How does Remunance handle gratuity for your India team?
Remunance accrues gratuity monthly, passes it through at cost and pays it inside the full and final settlement when someone leaves. We also collect the Form III nominations the new central rules require.
When you later set up your own entity, our India subsidiary formation service moves EOR staff across to your entity, with service history agreed up front. To size your gratuity liability today, get a costed India headcount plan.
What else do people ask about gratuity?
What is the gratuity formula in India?
Last drawn monthly wages × 15 ÷ 26 × completed years of service. Simple.
Is gratuity paid after 4 years and 8 months?
Not by statute for permanent staff, because the Code sets five years of continuous service as the threshold. How continuous service is counted can be contested in borderline cases, so take advice before you refuse a claim.
Is gratuity taxable in India?
It is exempt up to ₹20 lakh for private-sector employees. That limit was notified under the 1961 Act and continues under the Income-tax Act, 2025. Anything above is taxed. Gratuity is one line in a bigger picture, which our guide to employee benefits in India lays out.
Planning a hire in India?
Our founding team has run payroll and hiring in India for 22+ years, first as Remunance Systems, which was later acquired by ADP.