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Employee Gratuity Guide: Rules, Formula & Calculation Examples

📅 Updated February 2026 ⏱️ 18 min read

When I resigned from my first job after 5 years and 3 months, I received a gratuity payment of ₹2,87,500. I had no idea I was eligible for it—HR mentioned it casually during my exit interview, and honestly, I thought it was a bonus or goodwill gesture. It wasn't. Gratuity is a legal entitlement under the Payment of Gratuity Act, 1972, and every employee who completes five years of continuous service is entitled to it. That surprise payment covered three months of my living expenses during my job transition. Had I known about gratuity calculations earlier, I would have understood my true compensation package better and planned my resignation timing more strategically. This guide exists so you don't walk into your career blind to one of your most significant employment benefits.

This guide explains everything about gratuity in India: what gratuity is and why it exists, who is eligible and who isn't, how to calculate gratuity for different salary structures, taxation rules and exemptions, the withdrawal and claim process, and common scenarios (resignation, termination, death, retirement). Whether you're planning to resign, approaching retirement, or just want to understand your employment benefits, these details ensure you receive what you're legally owed.

🚨 MAJOR UPDATE: New Gratuity Rules Effective November 21, 2025

The Government of India implemented the Social Security Code 2020 on November 21, 2025, bringing historic changes to gratuity rules. This guide covers both the new rules (effective from Nov 2025) and existing rules that still apply to permanent employees.

Key Changes:

  • Fixed-term employees: Now eligible after just 1 year (previously 5 years)
  • Wage definition: Must include at least 50% of CTC in gratuity calculation
  • Tax exemption increased: ₹25 lakh for govt employees (from ₹20L)
  • Payment deadline: Must be paid within 30 days or 10% annual interest penalty

Note: Permanent employees still need 5 years of service. The 1-year rule applies ONLY to fixed-term/contract employees.

What is Gratuity?

Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for services rendered. It's governed by the Payment of Gratuity Act, 1972.

Key Characteristics

  • Legal entitlement: Not discretionary—employers must pay if you're eligible
  • One-time payment: Paid when employment ends (resignation, retirement, death, termination)
  • Based on tenure and salary: Longer service = higher gratuity
  • Mandatory for organizations: Any company with 10+ employees must provide gratuity

Why Gratuity Exists

The Payment of Gratuity Act was enacted to provide financial security to employees after years of loyal service. It serves as:

  • Retirement corpus: Additional savings for post-retirement life
  • Loyalty reward: Encourages long-term employment
  • Severance cushion: Financial buffer during job transitions
  • Family protection: Paid to nominees in case of employee death

2025 Labour Code Reforms: What Changed and Why

On November 21, 2025, India's labour landscape transformed with the implementation of four Labour Codes consolidating 29 old labour laws into unified frameworks. The Social Security Code 2020 brought the most significant gratuity reforms since the Payment of Gratuity Act, 1972.

Why the Government Made These Changes

India's workforce has evolved dramatically. In the 1970s, people spent 20-30 years in one company. Today, professionals change jobs every 2-4 years, contract work dominates IT/startups, and gig workers number in millions. The old 5-year eligibility rule excluded most modern workers from gratuity benefits—they completed projects, contributed value, but never qualified because tenure was too short.

Problems the old system created:

  • IT professionals on 2-year projects left with zero gratuity despite significant contributions
  • Contract manufacturing workers never qualified despite years of cumulative service
  • Companies manipulated salary structures (high allowances, low basic) to reduce gratuity payouts
  • Payment delays stretched 6-12 months with no penalties

The Four Major Changes (Effective November 21, 2025)

Change #1: Fixed-Term Employees Eligible After 1 Year

Old Rule: All employees (permanent or contract) needed 5 years continuous service New Rule: Fixed-term employees qualify after just 1 year of continuous service

Who is a "Fixed-Term Employee"?

Someone hired for a specific duration with a written contract stating start and end dates.

Examples of fixed-term employment:

  • IT professional hired for 2-year project (contract specifies end date)
  • Manufacturing worker on 18-month seasonal contract
  • Teacher hired for 1 academic year with renewal option
  • Consultant on 14-month assignment

NOT fixed-term:

  • Daily wage contract workers (no fixed duration)
  • Casual/temporary workers without duration contracts
  • Permanent employees (still need 5 years)

Impact: A software engineer on a 2-year contract who earns ₹60,000/month (Basic+DA: ₹40,000) now receives gratuity of ₹46,154 after 2 years instead of ₹0 under old rules.

Change #2: Minimum Wage Definition (50% Rule)

Old Rule: Only Basic + DA counted for gratuity calculation New Rule: Wages for gratuity calculation must be at least 50% of total CTC

Why this matters:

Many companies kept Basic salary artificially low (30-35% of CTC) and inflated allowances (HRA, conveyance, special allowance) to reduce gratuity liability. Under new rules, if Basic+DA is less than 50% of CTC, the deficit must be added back for gratuity calculation.

50% Wage Rule Example:

Old Salary Structure (Before Nov 2025):

  • Total CTC: ₹10,00,000/year (₹83,333/month)
  • Basic: ₹3,00,000/year (₹25,000/month) - 30% of CTC
  • DA: ₹50,000/year (₹4,167/month)
  • Other allowances: ₹6,50,000/year
  • Gratuity calculated on: ₹29,167/month (Basic+DA)

New Salary Structure (Post Nov 2025):

  • Total CTC: ₹10,00,000/year
  • Minimum wage for gratuity: 50% of ₹10L = ₹5,00,000/year (₹41,667/month)
  • Current Basic+DA: ₹3,50,000/year (₹29,167/month)
  • Shortfall: ₹1,50,000/year must be added
  • Gratuity now calculated on: ₹41,667/month (42% higher!)

Result for 10-year employee: Old system: ₹1,68,269 gratuity New system: ₹2,40,385 gratuity 42% increase!

Change #3: Enhanced Tax Exemption Limits

Employee Type Old Limit (Before Nov 2025) New Limit (Post Nov 2025) Increase
Private Sector Employees ₹20 lakh ₹20 lakh (unchanged) -
Government Employees ₹20 lakh ₹25 lakh +₹5 lakh

Note: There are proposals to increase private sector limit to ₹25 lakh in Budget 2026, but this is not yet confirmed.

Change #4: Mandatory 30-Day Payment with Penalties

Old Rule: No specific penalty for delayed gratuity payments New Rule: Employers must pay within 30 days of becoming due, or face 10% annual interest on delayed amount

Delay Penalty Example:

  • Gratuity due: ₹5,00,000
  • Payment delayed: 90 days (3 months)
  • Penalty: ₹5,00,000 × 10% × (90/365) = ₹12,329
  • Total employer must pay: ₹5,12,329

What Remains Unchanged

Despite major reforms, several aspects of gratuity remain identical:

  • Calculation formula: Still (Last Salary × 15 × Years) ÷ 26
  • Permanent employee eligibility: Still 5 years minimum
  • Maximum cap: Still ₹20 lakh for private sector (₹25L for govt)
  • Death/disability exception: Still paid regardless of tenure
  • Forfeiture for misconduct: Still allowed in serious cases

Transition Period: What Happens to Existing Employees?

Q: I was hired on a 3-year contract in January 2024. Do I get gratuity in January 2025 (after 1 year) or January 2027 (after 3 years)?

A: You become eligible after completing 1 year (January 2025), BUT you only receive gratuity when employment ends. If you complete the full 3-year contract, you'll receive gratuity for 3 completed years at exit (January 2027). The 1-year rule defines eligibility, not payout timing.

Q: I've been a permanent employee for 3 years. Can I claim gratuity under the new 1-year rule?

A: No. The 1-year eligibility applies ONLY to fixed-term employees. Permanent employees still need 5 years continuous service. You'll qualify after completing 5 years total.

Q: My company hasn't restructured salaries to meet the 50% rule. What happens?

A: Companies have until March 31, 2026, to restructure salary components. If Basic+DA is below 50% CTC on gratuity calculation date, the shortfall MUST be added for calculation—employer cannot escape this. Your actual monthly take-home might change (more Basic, fewer allowances), but total CTC should remain same.

Industry Impact Estimates

Sector Estimated Impact Reason
IT & Tech High (30-50% increase in gratuity liability) Heavy reliance on fixed-term contracts, low Basic salaries
Manufacturing Medium (20-30% increase) Mix of permanent and contract workers
Retail & Hospitality High (40-60% increase) Predominantly contract/seasonal workers
Construction Medium-High (25-40% increase) Project-based hiring, previously excluded
Banking & PSU Low (5-10% increase) Already had high Basic percentages, mostly permanent staff

Eligibility Criteria

Who is Eligible? (Updated for 2025 Rules)

Employee Type Service Required Effective From Details
Permanent Employees 5+ years continuous service 1972 Act (unchanged) Must complete 5 years unless death/disability
Fixed-Term Employees 1+ year continuous service Nov 21, 2025 (NEW) Contract must specify fixed duration/end date
Contract/Daily Wage Not eligible - No fixed duration contracts = no gratuity
Gig/Platform Workers Under discussion Proposed for 2026+ Framework being developed

The 5-Year Rule Explained

Continuous service calculation:

  • 240 days per year (normal establishments): Work at least 240 days in a calendar year
  • 190 days per year (seasonal establishments): Mines working <6 months/year

What Counts as "Continuous Service"?

  • Includes: Authorized leave, maternity leave, medical leave, layoffs
  • Excludes: Unauthorized absence, suspension periods

Example: Worked 220 actual days + 30 days approved leave = 250 days (qualifies for that year)

Special Cases: Less Than 5 Years

Gratuity is payable even with <5 years service if employment ends due to:

  • Death: Full gratuity paid to nominees regardless of tenure
  • Disability/illness: Permanent disability preventing work

Gratuity Calculation Formula

The formula differs based on whether your organization is covered under the Gratuity Act or not.

For Companies Covered Under the Act

Gratuity Formula (Covered Establishments):

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

  • Last Drawn Salary: Basic + Dearness Allowance (DA)
  • 15: Days of salary per year of service
  • 26: Working days in a month (assuming 4.33 weeks/month)
  • Years of Service: Completed years (round up if >6 months in final year)

For Companies NOT Covered Under the Act

Gratuity Formula (Non-Covered Establishments):

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30

Difference: Denominator is 30 instead of 26 (calendar days vs working days)

What is "Last Drawn Salary"?

Components included:

  • Basic Salary: Core pay component
  • Dearness Allowance (DA): If part of terms of employment
  • Commission (if applicable): Average of last 10 months if part of regular pay

Components excluded:

  • House Rent Allowance (HRA)
  • Conveyance Allowance
  • Medical Allowance
  • Performance Bonuses
  • Overtime pay
  • Any other allowances

⚠️ Maximum Gratuity Cap

Maximum gratuity payable is ₹20 lakhs (increased from ₹10 lakhs in 2019). Even if your calculation results in ₹25 lakhs, you'll receive only ₹20 lakhs.

Calculation Examples

Example 1: Standard 5-Year Service

Employee Details:

  • Basic Salary: ₹40,000/month
  • DA: ₹10,000/month
  • HRA: ₹15,000/month (not counted)
  • Years of Service: 5 years exactly

Calculation:

  • Last Drawn Salary = ₹40,000 + ₹10,000 = ₹50,000
  • Gratuity = (₹50,000 × 15 × 5) ÷ 26
  • Gratuity = (₹37,50,000) ÷ 26
  • Gratuity = ₹1,44,230

Example 2: 10+ Years Service

Employee Details:

  • Basic Salary: ₹60,000/month
  • DA: ₹15,000/month
  • Years of Service: 12 years 8 months
  • (Rounds to 13 years since >6 months)

Calculation:

  • Last Drawn Salary = ₹60,000 + ₹15,000 = ₹75,000
  • Gratuity = (₹75,000 × 15 × 13) ÷ 26
  • Gratuity = (₹1,46,25,000) ÷ 26
  • Gratuity = ₹5,62,500

Example 3: High Salary (Hitting the Cap)

Employee Details:

  • Basic Salary: ₹1,50,000/month
  • DA: ₹50,000/month
  • Years of Service: 20 years

Calculation:

  • Last Drawn Salary = ₹1,50,000 + ₹50,000 = ₹2,00,000
  • Gratuity = (₹2,00,000 × 15 × 20) ÷ 26
  • Gratuity = (₹6,00,00,000) ÷ 26
  • Calculated Gratuity = ₹23,07,692
  • Actual Gratuity Paid = ₹20,00,000 (capped)

Example 4: Fixed-Term Employee (New 2025 Rules)

Employee Details:

  • Employment Type: Fixed-term contract (18 months)
  • Basic Salary: ₹35,000/month
  • DA: ₹8,000/month
  • Years of Service: 1 year 6 months = 2 years (rounded up)
  • Note: This employee would receive ₹0 under old rules (didn't complete 5 years)

Calculation:

  • Last Drawn Salary = ₹35,000 + ₹8,000 = ₹43,000
  • Gratuity = (₹43,000 × 15 × 2) ÷ 26
  • Gratuity = (₹12,90,000) ÷ 26
  • Gratuity = ₹49,615

Impact of 2025 reforms: This employee now receives ₹49,615 instead of nothing. This amount can cover 1+ months of expenses during job transition.

Example 5: 50% Wage Rule Impact

Employee Details:

  • Total CTC: ₹8,00,000/year (₹66,667/month)
  • Basic (old structure): ₹2,40,000/year (₹20,000/month) - 30% of CTC
  • DA: ₹80,000/year (₹6,667/month)
  • Other allowances: ₹4,80,000/year
  • Years of Service: 12 years

Old Calculation (Before Nov 2025):

  • Last Drawn Salary = ₹20,000 + ₹6,667 = ₹26,667
  • Gratuity = (₹26,667 × 15 × 12) ÷ 26
  • Old Gratuity = ₹1,84,615

New Calculation (Post Nov 2025 - 50% Rule):

  • Minimum wage required: 50% of ₹8L = ₹4,00,000/year (₹33,333/month)
  • Current Basic+DA: ₹26,667/month (below minimum)
  • Adjusted salary for gratuity: ₹33,333/month
  • Gratuity = (₹33,333 × 15 × 12) ÷ 26
  • New Gratuity = ₹2,30,769

Difference: ₹46,154 more (25% increase) due to 50% wage rule!

Partial Year Service Rounding

Service Duration Rounded To Example
5 years 3 months 5 years <6 months ignored
5 years 7 months 6 years >6 months rounds up
8 years 6 months 9 years Exactly 6 months rounds up
12 years 11 months 13 years >6 months rounds up

Taxation on Gratuity

Gratuity taxation depends on employment type (government vs private) and amount received.

Tax Exemption Rules (Updated November 2025)

Employee Type Tax Exemption Limit Tax on Excess Change from Old Rules
Government Employees Up to ₹25 lakh (increased) No tax on any amount +₹5L (was ₹20L)
Private (Covered under Act) Least of: (a) ₹20L, (b) Actual gratuity, (c) 15 days salary × years Excess taxable as salary Unchanged
Private (Not covered) Least of: (a) ₹20L, (b) Actual gratuity, (c) 1/2 month avg salary × years Excess taxable as salary Unchanged

💡 Proposed Change for Budget 2026

There are discussions to increase the private sector tax exemption limit from ₹20 lakh to ₹25 lakh (matching government employees). This is NOT yet confirmed. If implemented in Budget 2026 (February), it would apply from April 1, 2026 (FY 2026-27).

Tax Calculation Example

Scenario: Private employee (covered under Act)

  • Gratuity received: ₹8,50,000
  • Service: 18 years
  • Last salary (Basic + DA): ₹70,000/month

Exemption Calculation (Least of three):

  • (a) Maximum limit: ₹20,00,000
  • (b) Actual received: ₹8,50,000
  • (c) (₹70,000 × 15 × 18) ÷ 26 = ₹7,26,923

Exempt amount = ₹7,26,923 (lowest of three)

Taxable amount = ₹8,50,000 - ₹7,26,923 = ₹1,23,077

This ₹1,23,077 is added to salary income and taxed per applicable slab.

Gratuity Withdrawal and Claim Process

Timeline for Payment

  • Legal deadline: Employer must pay within 30 days of gratuity becoming due
  • Application submission: Employee must apply using Form I (within prescribed format)
  • Payment delay: Employer liable for interest + penalty if delayed beyond 30 days

Required Documents

  • Form I (Application for Gratuity Payment)
  • Resignation letter or retirement notice
  • Experience/relieving letter
  • Bank account details
  • PAN card (for TDS purposes)
  • Form 15G/15H (if claiming exemption from TDS)

In Case of Death

If employee dies during service, gratuity is paid to:

  1. Nominee (if declared): As per employee's nomination form
  2. Legal heirs (if no nomination): Spouse, children, parents (in that order)

Documents needed:

  • Death certificate
  • Form I signed by nominee/legal heir
  • Succession certificate (if legal dispute)
  • ID proof of claimant

2025 Rule-Specific Scenarios

Scenario: Fixed-Term Employee Switching to Permanent

Question: I was on a 2-year fixed-term contract. After completion, company offered permanent position. How does gratuity work?

Answer:

  • Option 1 (Company pays gratuity at contract end): You receive gratuity for 2 years when fixed-term ends. If you accept permanent role, gratuity clock starts fresh. You'll need 5 more years to qualify again as permanent employee.
  • Option 2 (Company extends as permanent without break): Service is continuous. The 2 years as fixed-term count toward eventual gratuity. When you finally exit after 8 total years (2 fixed + 6 permanent), you receive gratuity for 8 completed years.
  • Which applies? Depends on company policy and contract terms. Get it in writing.

Scenario: Salary Restructuring Impact

Question: My company restructured salaries in January 2026 to meet 50% rule. My Basic increased, allowances decreased, but CTC stayed same. How does this affect my gratuity?

Answer:

  • For gratuity paid after restructure (Jan 2026 onwards): Higher Basic = higher gratuity. This benefits you.
  • For gratuity paid before restructure (Nov-Dec 2025): Even if salary wasn't restructured yet, 50% rule STILL applies. Company must calculate using minimum 50% CTC regardless of your actual salary structure at that time.
  • Take-home impact: Your monthly salary might look different (more Basic, less HRA), but shouldn't change total take-home significantly since CTC is same.

Scenario: Delayed Payment Penalty

Question: I resigned in December 2025. It's now February 2026 (60 days later) and still no gratuity. What can I do?

Answer:

  1. Verify claim submitted: Did you submit Form I within 30 days? If not, do it immediately.
  2. 30-day deadline: Employer had 30 days from your last working day. Since 60 days passed, they owe 10% annual interest.
  3. Calculate penalty: If gratuity is ₹3 lakh and delayed 30 days beyond deadline: ₹3L × 10% × (30/365) = ₹2,466 penalty
  4. Action: Send formal written demand citing Social Security Code 2020 Section 7 (payment within 30 days). If still not paid, file complaint with Labour Commissioner.

Scenario: Multi-Year Fixed-Term Contract

Question: I'm on a 4-year fixed-term contract. Do I get gratuity after 1 year or 4 years?

Answer:

  • Eligibility: After 1 year (you qualify)
  • Payment: Only when employment actually ends (after 4 years when contract completes)
  • Amount: Calculated based on 4 completed years of service
  • Important: If you resign midway (say after 2 years), you receive gratuity for 2 years at that time.

Think of it like this: 1-year rule is "eligibility gate" (you're now entitled). Payment happens only at exit. Amount depends on total years served at exit date.

Common Scenarios and FAQs

Scenario 1: Changing Jobs Before 5 Years

Question: I worked 4 years 10 months. Am I eligible?

Answer: No. You must complete 5 years continuous service. Consider staying 2 more months to qualify for gratuity (likely worth ₹1-2 lakhs depending on salary).

Scenario 2: Termination for Misconduct

Question: Can employer deny gratuity if I'm fired?

Answer: Gratuity can be forfeited ONLY if terminated for:

  • Willful omission/neglect causing damage/loss
  • Riotous or violent behavior
  • Moral turpitude offense

Regular underperformance or layoff does NOT forfeit gratuity.

Scenario 3: Part-Time or Contract Workers

Question: I'm on contract. Am I eligible?

Answer: Yes, if you've completed 240 days/year for 5 years continuously with the same employer, regardless of contract status.

Scenario 4: Company Shuts Down

Question: My company closed. Will I get gratuity?

Answer: Yes. Gratuity is a statutory liability. It's paid from:

  • Company's gratuity fund (if maintained)
  • Company's assets during liquidation
  • Insurance policy (if company had gratuity insurance)

Scenario 5: Rejoining Same Company

Question: I worked 3 years, left, rejoined after 1 year. Do years combine?

Answer: Generally no—service must be continuous. However, if gap is due to employer's request (e.g., project ended, rehired), courts may consider combined service. Consult legal advice for your specific case.

Strategic Considerations

Timing Your Resignation

If you're close to completing 5 years or a partial year will round up:

Example: Strategic Timing

  • Current tenure: 4 years 10 months
  • If you resign now: ₹0 gratuity
  • If you stay 2 more months: ~₹1.5 lakhs gratuity (assuming ₹50K salary)
  • Decision: Waiting 60 days could be worth ₹25,000/day in gratuity value

Salary Negotiations

Gratuity is based on Basic + DA, not total CTC. During salary negotiations:

  • Higher Basic % = Higher gratuity later
  • ₹50K basic vs ₹40K basic = 25% more gratuity after 10 years
  • Don't accept structures with very low basic and high allowances

Final Thoughts: A Historic Shift for Employee Rights

The November 2025 gratuity reforms represent the most significant labour law changes India has seen in decades. For the first time, the government acknowledged that employment has fundamentally changed—people don't stay in one company for 30 years anymore, and that shouldn't mean they forfeit retirement benefits.

If you're a fixed-term employee, this changes everything. That 2-year IT project contract, 18-month manufacturing assignment, or 3-year consulting role that previously gave you zero gratuity? You now walk away with ₹50,000 to ₹2 lakh depending on your salary—money that can bridge unemployment gaps, fund upskilling, or provide emergency cushion during transitions.

If you're a permanent employee, the 50% wage rule likely increases your eventual gratuity by 15-40% depending on how heavily your company relied on allowances instead of Basic salary. That's potentially lakhs more in your pocket at retirement.

But reforms only matter if you know about them. Most employees will remain unaware until it's too late. Don't be one of them. If you're on a fixed-term contract, mark your 1-year anniversary—you're now eligible. If you're approaching retirement, verify your salary structure complies with 50% rule. If you're owed gratuity, ensure payment happens within 30 days or demand the penalty interest.

This isn't about getting more than you deserve. It's about getting what labour law now guarantees you. The Payment of Gratuity Act, 1972 was designed for a different era. The Social Security Code 2020 brings it into the 21st century—but only if you claim what's rightfully yours.

⚠️ Implementation Timeline

  • November 21, 2025: Labour Codes officially effective
  • December 2025 - March 2026: State-level notifications and company salary restructuring
  • April 1, 2026: Full enforcement expected, digital claim portals launch
  • FY 2026-27: First full year under new rules

If you have a gratuity claim during Dec 2025 - Mar 2026 transition period and company resists new rules, cite the official Press Information Bureau notification (Nov 21, 2025) and Social Security Code 2020 Section 7.

🎯 Your Updated Gratuity Action Plan (2025 Rules)

  1. Determine your employee type: Permanent (need 5 years) vs. Fixed-term (need 1 year)
  2. Calculate your eligibility date: When do you qualify under new rules?
  3. Verify salary structure: Is Basic+DA at least 50% of CTC? If not, company must adjust for gratuity calculation
  4. Know your numbers: Use formula (Basic+DA × 15 × Years) ÷ 26, but ensure salary meets 50% minimum
  5. Understand tax: Up to ₹20L exempt (₹25L for govt employees)
  6. Track payment deadline: Must be paid within 30 days or 10% interest penalty applies
  7. Submit Form I promptly: Don't delay—employer's 30-day clock starts when you submit
  8. If fixed-term to permanent: Clarify whether prior service counts toward future gratuity

Calculate Your Gratuity (Updated for 2025 Rules)

Ready to see exactly how much gratuity you're entitled to under the new 2025 Labour Code? Our updated gratuity calculator includes the 50% wage rule and 1-year eligibility for fixed-term employees.

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