Gratuity is a lump sum your employer pays when you leave after long service. It is usually 15 days’ wages for every completed year of service. The Labour Codes in force since 21 November 2025 also give fixed-term employees gratuity after one year.
Who is eligible
- Permanent employees: at least 5 years of continuous service with the same employer.
- Fixed-term employees: pro-rata gratuity after 1 year of service under the Code on Social Security, 2020.
- Death or disablement: the minimum service rule does not apply; gratuity goes to the employee or nominee.
- Employers with 10 or more employees are covered. Others may pay gratuity under their own policy.
The formula
Gratuity = last drawn wages × 15 ÷ 26 × completed years of service
- Wages usually means basic pay plus dearness allowance. Under the Labour Codes, if allowances exceed 50% of total pay, the excess is added back to wages, which can raise gratuity.
- 26 is the number of working days in a month. Employers not covered by the law often use 30.
- Years: a final part-year of more than 6 months counts as a full year.
Worked example
| Item | Value |
|---|---|
| Last basic + DA | ₹60,000 a month |
| Service | 8 years 7 months → counted as 9 years |
| Gratuity (₹60,000 × 15 ÷ 26 × 9) | ₹3,11,538 |
Check your own figure with the gratuity calculator.
Limits and tax
- Maximum payable under the law: ₹20 lakh for most private employees. An employer can choose to pay more.
- Tax for private employees: the tax-free part is the lowest of the gratuity received, the formula amount and the notified limit (commonly ₹20 lakh). Anything above is taxed as salary.
- Government employees: gratuity is fully tax-free.
- The exemption applies under both the old and new tax regimes.
Limits are revised by notification from time to time, so check the current figure in the year you retire or resign.
If your employer doesn’t pay
- Gratuity must be paid within 30 days of becoming due; late payment attracts interest.
- Apply to your employer in writing first and keep a copy.
- If it is still unpaid, you can approach the labour authority (controlling authority) for your area.
Gratuity is usually part of your CTC – see CTC vs in-hand salary. For retirement planning, try the retirement calculator.
Frequently asked questions
How is gratuity calculated?
Last drawn basic pay plus DA × 15 ÷ 26 × completed years of service. A final part-year of more than 6 months counts as a full year.
Do fixed-term employees get gratuity?
Yes. Under the Code on Social Security, 2020, fixed-term employees get pro-rata gratuity after one year of service.
Is gratuity taxable?
For private employees, gratuity up to the notified limit (commonly ₹20 lakh) is tax-free; anything above is taxed as salary. Government employees’ gratuity is fully tax-free.