# Gratuity formula India: how to calculate it | Peoplo.ai

URL: https://peoplo.ai/in/en/blog/gratuity-calculation-formula/

> 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.

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Payroll

# Gratuity calculation formula in India: 15/26 explained with examples

Peoplo.ai team · 6 min read

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](https://peoplo.ai/in/en/tools/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](https://peoplo.ai/in/en/blog/full-and-final-settlement-two-working-days/) .

## 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](https://peoplo.ai/in/en/tools/salary-calculator/) , and see the rules for PF, ESI, TDS and gratuity together in the [payroll compliance guide](https://peoplo.ai/in/en/compliance/#gratuity) .

## How Peoplo.ai handles gratuity

Peoplo.ai [payroll](https://peoplo.ai/in/en/platform/payroll/) keeps gratuity provisions month by month. When someone leaves, the [exit coordinator agent](https://peoplo.ai/in/en/ai-agents/) prepares the [full and final settlement](https://peoplo.ai/in/en/platform/onboarding-exits/) , and a person approves it before anything is paid.

Sources

- [India Code: Code on Social Security, 2020 (gratuity, section 53)](https://www.indiacode.nic.in/bitstream/123456789/16823/1/aA2020-36.pdf)
- [Labour Law Reporter: gratuity under the labour codes](https://labourlawreporter.com/gratuity.asp)

General information, not legal or tax advice. Rules change, so check the source before you act.

Payroll that keeps up with the rules

Peoplo.ai agents prepare each payroll run and flag anything unusual. A person approves before anyone is paid.

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Questions

## Frequently asked questions

Short answers to the questions people ask most about this topic.

### What is the formula for gratuity calculation?

Gratuity = 15 ÷ 26 × last monthly wages × completed years of service. Wages are basic pay plus dearness allowance. The result is capped at ₹20 lakh.

### How is gratuity calculated for private employees?

The same way: 15 days' wages for each completed year, with a month taken as 26 working days. Private-sector employees in establishments with 10 or more employees are covered once they have 5 years of continuous service, or 1 year on a fixed-term contract.

### Is gratuity paid before 5 years?

Only in some cases. Fixed-term employees qualify after 1 year and are paid for the exact time served. On death or disablement, gratuity is paid whatever the length of service. Other employees need 5 years of continuous service.

### Does 4 years and 7 months count as 5 years for gratuity?

For the amount, a final part year of more than six months is counted as a full year. Whether 4 years and 7 months meets the 5-year eligibility rule is a separate question that courts have answered differently, so check it with your legal adviser before you rely on it.

### Is gratuity taxable?

For private-sector employees, gratuity up to ₹20 lakh is tax-free. Any amount above that limit is taxed as salary.

### How does the new labour code change gratuity?

Two things. Fixed-term employees now qualify after 1 year instead of 5. And wages are defined more widely: if allowances left out of wages are more than half of total pay, the excess is added back, which can raise gratuity for people on a low basic.

## Keep reading

[Payroll EPF wage ceiling is now ₹25,000: what employers need to change Read](https://peoplo.ai/in/en/blog/epf-wage-ceiling-25000/) [Labour codes Full and final settlement in two working days: a checklist for HR Read](https://peoplo.ai/in/en/blog/full-and-final-settlement-two-working-days/)