How gratuity is calculated
Gratuity is a lump sum your employer pays when you leave after qualifying service, retire, or on death or disability. For employers covered by the law (generally those with 10 or more employees), it's 15 days' wages for every completed year of service, where a month is treated as 26 working days.
Covered employers: Gratuity = last wage × 15 × years ÷ 26
Not covered: Gratuity = last wage × 15 × years ÷ 30Worked example
What changed with the labour codes
The new labour codes took effect on 21 November 2025. Two changes matter most for gratuity:
- Fixed-term employees now qualify after just one year of service, instead of five.
- Wider definition of wages: basic pay plus DA should be at least 50% of total pay. If your employer restructures pay to meet this, your gratuity rises with it.
Permanent employees still need five years of continuous service, although courts and employers commonly treat 4 years and 240 days as five years. Death or disability waives the requirement entirely.
Tax on gratuity
For private-sector employees, gratuity is tax-free up to a lifetime limit of ₹20 lakh; anything above is taxed at your slab rate. Gratuity for government employees is fully tax-free. The exemption applies in both tax regimes.
Gratuity is often shown as part of your CTC (about 4.81% of basic). See how it affects your monthly pay on the in-hand salary calculator.
Frequently asked questions
Am I eligible for gratuity before 5 years?
Permanent employees normally need 5 years. Fixed-term employees qualify after 1 year under the labour codes, and there's no minimum on death or disability.
Is gratuity calculated on CTC?
No. It's based on your last drawn basic salary plus dearness allowance, not your CTC.
What's the maximum gratuity I can receive?
The law caps the amount an employer must pay, and ₹20 lakh is the tax-free limit for private-sector employees. Employers can pay more voluntarily, but the excess is taxable.
Official references: Ministry of Labour & Employment · Income Tax Department