Gratuity Calculation 2026: Formula, Eligibility and ₹20 Lakh Tax-Free Limit
Last updated: 13 October 2026
Quick answer: Gratuity calculation uses one formula: last drawn wages (basic + DA) × 15 ÷ 26 × completed years of service. Permanent employees need five years; fixed-term employees qualify after one year under the labour codes in force since 21 November 2025. Private-sector gratuity is tax-free up to ₹20 lakh over your lifetime; government employees' gratuity is fully exempt.
Last updated: 13 October 2026 Quick answer: Gratuity calculation uses one formula: last drawn wages (basic + DA) × 15 ÷ 26 × completed years of service. Permanent employees need five years; fixed-term employees qualify after one year under the labour codes in force since 21 November 2025. Private-sector gratuity is tax-free up to ₹20 lakh over your lifetime; government employees' gratuity is fully exempt. Key takeaways Formula: ₹1 lakh basic + DA × 15/26 × 10 years = about ₹5.77 lakh. Eligibility: 5 years for permanent staff, 1 year for fixed-term staff, none on death or disablement. Wider wages: allowances above 50% of pay are now added back, which can lift gratuity by 40% or more. Tax: ₹20 lakh lifetime exemption for private employees, in both the old and new regimes. Timeline: employers must pay an admitted claim within 30 days of your application. Gratuity is often the second-largest cheque a salaried employee receives on leaving a job, after the EPF settlement. Yet many people discover only at exit that they missed eligibility by a few months, or that their pay structure kept the amount small. The labour codes that came into force on 21 November 2025 changed both of those things. This guide explains the gratuity calculation formula with worked tables, who qualifies under the new Code on Social Security, how the 50% wage rule affects your payout, and how the ₹20 lakh tax-free limit works under the Income-tax Act, 2025. Gratuity Calculation: What is gratuity and who pays it? Gratuity is a lump-sum benefit an employer pays when an employee leaves after long service, as a reward for that service. It is paid entirely by the employer; nothing is deducted from your salary for it, although many companies show it as part of cost to company. Until November 2025, it was governed by the Payment of Gratuity Act, 1972. That law is now subsumed in Chapter V of the Code on Social Security, 2020, which applies to establishments with ten or more employees. The Social Security (Central) Rules, 2026, notified on 8 May 2026, replaced the 1972 gratuity rules with new forms and timelines. Many employers fund the liability through a group gratuity policy with a life insurer. That protects you if the company runs into trouble, but your entitlement is set by law, not by the policy. How is gratuity calculated? The 15/26 formula For employees covered by the gratuity law, the gratuity calculation formula is: Gratuity = Last drawn monthly wages × 15 ÷ 26 × Completed years of service Wages: basic pay plus dearness allowance, now read with the wider definition explained below. 15 ÷ 26: fifteen days' wages for each year, treating a month as 26 working days. Years: completed years, with a final part-year of more than six months rounded up. So 9 years and 7 months counts as 10 years. Example: Priya, a Pune-based engineer, leaves after 9 years and 7 months on a last drawn basic plus DA of ₹60,000. Her gratuity is ₹60,000 × 15 ÷ 26 × 10, or about ₹3.46 lakh. Basic + DA (₹/month) 5 years 10 years 15 years 20 years 25 years ₹30,000 ₹0.87 lakh ₹1.73 lakh ₹2.60 lakh ₹3.46 lakh ₹4.33 lakh ₹50,000 ₹1.44 lakh ₹2.88 lakh ₹4.33 lakh ₹5.77 lakh ₹7.21 lakh ₹1,00,000 ₹2.88 lakh ₹5.77 lakh ₹8.65 lakh ₹11.54 lakh ₹14.42 lakh ₹1,50,000 ₹4.33 lakh ₹8.65 lakh ₹12.98 lakh ₹17.31 lakh ₹20 lakh (cap) ₹2,00,000 ₹5.77 lakh ₹11.54 lakh ₹17.31 lakh ₹20 lakh (cap) ₹20 lakh (cap) The statutory payout is capped at ₹20 lakh for private-sector employees. On a ₹2 lakh basic, you hit the cap after about 17 years; on ₹1.5 lakh, after about 23. An employer can pay more under its own policy, but the excess is taxable. Gratuity calculation chart showing payout after 10 and 20 years for monthly basic plus DA from ₹30,000 to ₹1,50,000 What if your employer is not covered by the gratuity law? Some small firms fall outside the law. Any gratuity they pay voluntarily is worked out differently for tax: half a month's average salary, based on the last ten months, for each completed year. A ₹80,000 average over 12 years gives a tax-exempt amount of ₹4.8 lakh, against ₹5.54 lakh under the 15/26 formula. No rounding up of part-years applies here. Who is eligible for gratuity under the new labour codes? The four labour codes took effect on 21 November 2025, replacing 29 central labour laws. For gratuity, three eligibility rules now apply: Permanent employees: five years of continuous service is still required on resignation or retirement. Fixed-term employees: gratuity is payable after one year of service, pro rata. The PIB backgrounder on the labour reforms (https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192524) highlights this as one of the main gains for contract-style roles. Death or disablement: no minimum service applies. Gratuity is paid to the nominee or legal heirs. A fixed-term employee on a ₹50,000 basic who completes one year receives about ₹28,846; two years gives ₹57,692. Under the Central Rules, as summarised in a legal note on the 2026 Rules (https://webiis10.mondaq.com/india/employee-rights-labour-relations/1792872/notified-social-security-code-central-rules-2026-what-employers-need-to-know) , service beyond six months in the final year rounds up for fixed-term staff too. The one-year rule does not apply to permanent employees, a point that caused confusion when the codes were announced. If you are on a permanent contract, plan job moves with the five-year mark in mind. Leaving at four years and ten months can cost you several lakh. Comparison of gratuity rules under the Payment of Gratuity Act and the new labour codes, including eligibility and wage definition Does a notice period count towards five years? Yes, generally. Service runs until your last working day, so a notice period served in full counts. Garden leave also counts if you remain on the rolls. If you are close to five years, check your exact last working day with HR before you resign rather than relying on the offer-letter date. How does the 50% wage rule change gratuity? This is the biggest change for salaried professionals. The codes use a single definition of "wages" across gratuity, provident fund and bonus. Basic pay, DA and retaining allowance count as wages. Items such as HRA, conveyance, overtime and commission are excluded, but only up to half of total remuneration. If the excluded allowances exceed 50% of total pay, the excess is added back to wages. Many Indian pay structures keep basic at 30–40% of salary, so this matters. ₹1 lakh monthly pay, 10 years Old method Labour-code method Basic + DA ₹35,000 ₹35,000 Allowances (excluded) ₹65,000 ₹65,000, of which ₹15,000 above the 50% limit Wages for gratuity ₹35,000 ₹50,000 Gratuity ₹2,01,923 ₹2,88,462 Increase – About 43% Employers are responding by restructuring salaries, often raising basic and trimming allowances. That lifts gratuity and EPF, but can lower take-home pay where provident fund is contributed on full basic. Our EPF calculator guide (/insights/epf-calculator-eps-pension-guide) shows how a higher basic compounds in your PF account. Two cautions. First, the advisory firm EY noted that some questions, such as how performance bonuses are treated, were still open when the codes took effect; see its alert on the codes (https://www.ey.com/content/dam/ey-unified-site/ey-com/en-in/alerts-hub/2025/11/new-labour-codes-implemented-across-the-country-effective-21-november-2025.pdf) . Second, how the new definition applies to service before November 2025 depends on your employer's reading. Ask HR how your gratuity will be computed. Gratuity calculation under new labour codes showing a 43% higher payout when allowances above 50% of pay are added back to wages Is gratuity taxable? The ₹20 lakh tax-free limit From 1 April 2026, gratuity exemptions sit in the table under section 19 of the Income-tax Act, 2025 (https://www.incometaxindia.gov.in/w/section-19-199) , which replaced section 10(10) of the 1961 Act. The treatment depends on who employs you. Employee type Tax-free amount Central/State Government, local authority Entire gratuity Private, covered by gratuity law Lowest of: actual gratuity; amount under the statutory formula and ceiling (₹20 lakh) Private, not covered Lowest of: actual gratuity; ½ month's average salary × completed years; ₹20 lakh Received by nominee on death Not taxed as salary in the nominee's hands The ₹20 lakh figure has applied since March 2018 for covered employees and was extended to non-covered employees by notification S.O. 1213(E) of 8 March 2019, as the Income Tax Department's FAQ (https://www.incometaxindia.gov.in/w/what-is-the-effective-date-of-enhancement-of-limit-of-gratuity-from-rs-10-lakh-to-20-lakh-for-purpose-of-tax-exemption-computation-under-section-10-10-ii-) confirms. The 2025 Act refers to the "notified" amount rather than a number, and no higher figure had been notified for the private sector as of October 2026. Gratuity tax-free limit tiles for government and private employees under the Income-tax Act 2025 The lifetime cap catches job-hoppers The ₹20 lakh is a lifetime limit, not per employer. If you received ₹6 lakh tax-free from a previous employer, only ₹14 lakh more can be exempt in future. Keep your old Form 16 or relieving documents showing past gratuity. Worked example: gratuity above the cap Rajesh, a senior manager, receives ₹28 lakh under his company's enhanced gratuity policy. ₹20 lakh is exempt; ₹8 lakh is added to his salary. At the 30% slab plus 4% cess, the tax is about ₹2.5 lakh. If arrears push income up unusually, relief under the provisions that replaced section 89 may help; ask your tax consultant. Does the new tax regime allow the gratuity exemption? Yes. The gratuity exemption is available in both the old and new regimes, unlike HRA or section 80C. For more on regime choice, see our tax planning guide for FY 2026-27 (/insights/tax-planning-guide-india) and our explainer on what the Income-tax Act 2025 changed (/insights/income-tax-act-2025-changes-individuals) . Why do government employees have a ₹25 lakh limit? That figure is a payout ceiling, not a tax limit. The Department of Pension and Pensioners' Welfare raised the maximum retirement and death gratuity for Central Government employees from ₹20 lakh to ₹25 lakh from 1 January 2024, after DA reached 50% ( OM dated 30 May 2024 (https://www.staffnews.in/2024/05/enhancement-of-maximum-limit-of-gratuity-doppw-om.html) ). Their gratuity remains fully tax-free. Private-sector employees did not get a matching increase. How do you claim gratuity, and how long does it take? Under the Social Security (Central) Rules, 2026, you apply to your employer after gratuity becomes payable, ordinarily within 30 days. The employer must issue a notice admitting or rejecting the claim within 15 days and pay an admitted claim within 30 days of receiving the application. Legal heirs get up to a year to apply. If the employer delays or disputes the amount, you can approach the competent authority under the Code, and interest is payable on late payment. Gratuity cannot be attached by a court decree, and it can be forfeited only in narrow cases such as dismissal for misconduct that caused loss to the employer. Steps to claim gratuity from an employer under the Social Security Central Rules 2026 How should you use your gratuity? Gratuity often lands at a moment of change: a new job, a layoff or retirement. Treat it as part of your retirement corpus rather than spending money. Three common uses: Between jobs: top up the emergency fund first; our 90-day money plan after a layoff (/insights/laid-off-money-plan-it-professionals) covers the order of priorities. At retirement: combine it with EPF and other savings into an income plan, such as a bucket strategy with a systematic withdrawal plan (/insights/swp-systematic-withdrawal-plan-guide) . Mid-career: invest it towards long-term goals, rather than letting it sit in a savings account. If you are within five years of retirement, our pre-retirement checklist (/insights/five-years-to-retirement-checklist) and the retirement calculator (/tools) show how gratuity fits with your other income sources. Related reading EPF and VPF in 2026: rules, withdrawals and tax (/insights/epf-vpf-rules-withdrawal-tax-2026) EPF calculator: how your PF and EPS pension grow (/insights/epf-calculator-eps-pension-guide) Retirement tax planning: five withdrawal strategies (/insights/retirement-tax-planning-five-withdrawal-strategies) HRA exemption: how it is calculated (/insights/hra-exemption-calculation) Retirement planning in India: how much corpus (/insights/retirement-planning-guide-india) Frequently Asked Questions What is the formula for gratuity calculation? For employees covered by the gratuity law, gratuity equals last drawn monthly wages (basic plus dearness allowance) × 15 ÷ 26 × completed years of service. A final part-year of more than six months counts as a full year. For example, ₹50,000 × 15 ÷ 26 × 10 years gives about ₹2.88 lakh. The statutory payout is capped at ₹20 lakh for private-sector employees. Is gratuity payable after 1 year of service? Only for fixed-term employees. Under the Code on Social Security, in force since 21 November 2025, fixed-term employees qualify after one year on a pro rata basis. Permanent employees still need five years of continuous service, except where employment ends due to death or disablement, when no minimum service applies. What is the tax-free limit on gratuity in 2026? For private-sector employees, gratuity is tax-free up to ₹20 lakh over a lifetime, subject to the formula limits. Government employees' gratuity is fully exempt. The exemption now sits in section 19 of the Income-tax Act, 2025, and applies under both the old and new tax regimes. Any amount above the limit is taxed at your slab rate. Will the new labour codes increase my gratuity? Possibly. The codes define wages more widely: if allowances excluded from wages exceed 50% of your total pay, the excess is added back. If your basic plus DA is a small share of salary, your gratuity base rises. In our example, a ₹1 lakh salary with ₹35,000 basic sees gratuity rise about 43% over ten years. Is the ₹20 lakh gratuity limit per employer? No. The ₹20 lakh tax exemption is a lifetime limit across all employers. Any gratuity exempted earlier reduces the amount available later. If you received ₹5 lakh tax-free from one employer, the remaining exemption for future gratuity is ₹15 lakh. Keep records of earlier payouts for your return. How long does an employer have to pay gratuity? Under the Social Security (Central) Rules, 2026, an employer must decide on the claim within 15 days and pay an admitted claim within 30 days of receiving the application. If payment is delayed, interest is payable, and you can approach the competent authority under the Code on Social Security. Is gratuity paid to a nominee taxable? Gratuity received by a nominee or legal heir after the employee's death is not taxed as salary, because the recipient was not the employee. For the employee's own family, filing a valid nomination with the employer is the simplest way to make sure the money reaches them quickly. Sources: PIB: India's labour reforms backgrounder, 21 Nov 2025 (https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192524) ; EY: labour codes effective 21 Nov 2025 (https://www.ey.com/content/dam/ey-unified-site/ey-com/en-in/alerts-hub/2025/11/new-labour-codes-implemented-across-the-country-effective-21-november-2025.pdf) ; Income Tax Department: section 19, Income-tax Act 2025 (https://www.incometaxindia.gov.in/w/section-19-199) ; Income Tax Department: ₹20 lakh gratuity limit FAQ (https://www.incometaxindia.gov.in/w/what-is-the-effective-date-of-enhancement-of-limit-of-gratuity-from-rs-10-lakh-to-20-lakh-for-purpose-of-tax-exemption-computation-under-section-10-10-ii-) ; Mondaq: Social Security (Central) Rules 2026 (https://webiis10.mondaq.com/india/employee-rights-labour-relations/1792872/notified-social-security-code-central-rules-2026-what-employers-need-to-know) ; DoPPW OM, 30 May 2024 (https://www.staffnews.in/2024/05/enhancement-of-maximum-limit-of-gratuity-doppw-om.html) . Worked examples are Money n Wealth calculations. Leaving a job or retiring with a gratuity cheque? Gratuity, EPF and leave encashment are taxed differently and need one plan to avoid waste. Talk to Money n Wealth (/contact) for a free portfolio review. This article is for general educational purposes only and does not constitute financial advice. Figures and examples are illustrative. Please consult a qualified financial adviser for guidance specific to your situation. Money n Wealth (Predics Fintech Services Pvt Ltd) is an AMFI-registered Mutual Fund Distributor (ARN-121995) and APMI-registered PMS Distributor (APRN07444); it is not a SEBI-registered investment adviser and may earn distribution commission on investments made through it.
Frequently Asked Questions
What is the formula for gratuity calculation?
For employees covered by the gratuity law, gratuity equals last drawn monthly wages (basic plus dearness allowance) × 15 ÷ 26 × completed years of service. A final part-year of more than six months counts as a full year. For example, ₹50,000 × 15 ÷ 26 × 10 years gives about ₹2.88 lakh. The statutory payout is capped at ₹20 lakh for private-sector employees.
Is gratuity payable after 1 year of service?
Only for fixed-term employees. Under the Code on Social Security, in force since 21 November 2025, fixed-term employees qualify after one year on a pro rata basis. Permanent employees still need five years of continuous service, except where employment ends due to death or disablement, when no minimum service applies.
What is the tax-free limit on gratuity in 2026?
For private-sector employees, gratuity is tax-free up to ₹20 lakh over a lifetime, subject to the formula limits. Government employees' gratuity is fully exempt. The exemption now sits in section 19 of the Income-tax Act, 2025, and applies under both the old and new tax regimes. Any amount above the limit is taxed at your slab rate.
Will the new labour codes increase my gratuity?
Possibly. The codes define wages more widely: if allowances excluded from wages exceed 50% of your total pay, the excess is added back. If your basic plus DA is a small share of salary, your gratuity base rises. In our example, a ₹1 lakh salary with ₹35,000 basic sees gratuity rise about 43% over ten years.
Is the ₹20 lakh gratuity limit per employer?
No. The ₹20 lakh tax exemption is a lifetime limit across all employers. Any gratuity exempted earlier reduces the amount available later. If you received ₹5 lakh tax-free from one employer, the remaining exemption for future gratuity is ₹15 lakh. Keep records of earlier payouts for your return.
How long does an employer have to pay gratuity?
Under the Social Security (Central) Rules, 2026, an employer must decide on the claim within 15 days and pay an admitted claim within 30 days of receiving the application. If payment is delayed, interest is payable, and you can approach the competent authority under the Code on Social Security.
Is gratuity paid to a nominee taxable?
Gratuity received by a nominee or legal heir after the employee's death is not taxed as salary, because the recipient was not the employee. For the employee's own family, filing a valid nomination with the employer is the simplest way to make sure the money reaches them quickly.
Leaving a job or retiring with a gratuity cheque?
Gratuity, EPF and leave encashment are taxed differently and need one plan to avoid waste. Talk to Money n Wealth for a free portfolio review.
