Gratuity is 15 ÷ 26 × last basic pay plus DA × years of service, due after 5 years (1 for fixed-term staff), capped at ₹20 lakh. With worked examples.
Gratuity is 15 days’ wages for every completed year of service, with a month counted as 26 working days. In a formula:
Gratuity = 15 ÷ 26 × last monthly wages × years of service
Wages here are basic pay plus dearness allowance (DA). Gratuity is due when an employee leaves after 5 years of continuous service, or after 1 year on a fixed-term contract, and it is capped at ₹20 lakh. You can work out any case with the gratuity calculator.
What is the formula for gratuity calculation?
Take the last monthly basic pay plus DA, multiply by 15, divide by 26, and multiply by the number of years counted.
- 15 is the number of days’ wages paid for each year.
- 26 is the number of working days the law assumes in a month.
- Years counted are completed years of service. A final part year of more than six months counts as a full year, so 7 years and 8 months counts as 8, while 7 years and 6 months counts as 7.
A worked example
An employee leaves after 7 years and 8 months. Their last basic pay plus DA was ₹60,000 a month.
| Step | Value |
|---|---|
| Last monthly wages | ₹60,000 |
| Years counted (7 years 8 months) | 8 |
| 15 ÷ 26 × ₹60,000 × 8 | ₹2,76,923 |
| Gratuity payable | ₹2,76,923 |
Had they left at 7 years and 6 months, 7 years would count and the gratuity would be ₹2,42,308.
How is gratuity calculated for private employees?
The formula is the same for every employee covered by the law. Private-sector employers with 10 or more employees must pay gratuity. Three more cases:
| Employee | Last monthly wages | Service | Gratuity |
|---|---|---|---|
| Regular employee | ₹30,000 | 5 years | ₹86,538 |
| Regular employee | ₹25,000 | 10 years | ₹1,44,231 |
| Fixed-term employee | ₹40,000 | 2 years 3 months | ₹51,923 |
| Regular employee, senior | ₹2,00,000 | 20 years | ₹20,00,000 (the formula gives ₹23,07,692, above the cap) |
Fixed-term employees are paid pro rata for the exact time served, so 2 years and 3 months counts as 2.25 years.
Who is eligible for gratuity?
- Regular employees after 5 years of continuous service.
- Fixed-term employees after 1 year, paid for the exact time served.
- On death or disablement, gratuity is paid whatever the length of service, to the employee or their nominee.
What is the maximum gratuity?
The ceiling remains ₹20 lakh until a new one is notified. For private-sector employees, gratuity up to that amount is tax-free; anything above it is taxed as salary.
When must gratuity be paid?
Within 30 days of it becoming due, usually the employee’s exit. Most companies pay it with the full and final settlement.
What the labour codes change
The Code on Social Security replaced the Payment of Gratuity Act from 21 November 2025. For gratuity, two changes matter:
- Fixed-term employees qualify after 1 year, not 5.
- Wages are defined more widely. Wages are basic pay, DA and retaining allowance. If the allowances left out are more than half of total pay, the excess is added back to wages. A salary structure with a very low basic now gives a higher gratuity than before.
Check your salary structures against the 50% rule with the salary calculator, and see the rules for PF, ESI, TDS and gratuity together in the payroll compliance guide.
How Peoplo.ai handles gratuity
Peoplo.ai payroll keeps gratuity provisions month by month. When someone leaves, the exit coordinator agent prepares the full and final settlement, and a person approves it before anything is paid.
Sources
- India Code: Code on Social Security, 2020 (gratuity, section 53)
- Labour Law Reporter: gratuity under the labour codes
General information, not legal or tax advice. Rules change, so check the source before you act.