Gratuity Calculator India 2026: Formula, Eligibility & HR Guide

You’ve just processed a Full & Final settlement for an employee with 7 years of service, and your finance team is asking: “How much gratuity do we owe?” You open a spreadsheet, stare at the 15/26 formula, second-guess whether to include HRA, and end up spending 45 minutes on a number you’re still not fully confident about. Sound familiar?

Gratuity seems straightforward on paper — but between eligibility quirks, rounding rules, the new labour code changes, and the ₹20 lakh tax ceiling, it catches HR teams off guard every single time. This guide breaks it all down. And if you want the math done in seconds, use EZHRM’s free Gratuity Calculator.

What Is Gratuity — and Why Does It Trip Up HR Teams?

Gratuity is a statutory lump-sum benefit paid by employers to employees as recognition of long service. It is governed by the Payment of Gratuity Act, 1972, which applies to every establishment employing 10 or more employees. Once an establishment crosses that threshold, it remains covered even if headcount later falls below 10 — a detail that surprises many small business owners.

The confusion arises from three places: what “last drawn salary” actually means for this calculation (hint: it is not your full CTC component), how to handle partial years of service, and which formula applies to your organisation. Get any of these wrong and you’re either underpaying — which is a legal liability under Section 9 of the Act — or overpaying and taking an unnecessary hit on your P&L. The EZHRM Gratuity Calculator eliminates all three sources of error.

Who Is Eligible for Gratuity in India?

An employee becomes eligible for gratuity when their employment ends — through superannuation, retirement, resignation, death, or disablement — provided they meet the service requirement below.

The 5-Year Continuous Service Rule

An employee must have completed at least 5 years of continuous service with the same employer to be eligible on resignation or retirement. There is one important nuance: if an employee has completed 4 years and 240 days in the fifth year, most courts and labour authorities treat this as 5 complete years. So if your departing employee is anywhere close to that 240-day mark in their fifth year, run the calculation with EZHRM’s free Gratuity Calculator before processing their Full & Final — do not round down by default.

Exceptions: Death and Disablement

The 5-year rule does not apply when an employee dies or is disabled due to an accident or disease. In these cases, gratuity is payable regardless of length of service — even 6 months qualifies. The amount is paid to the employee’s registered nominee or legal heir. Make sure your employee records include updated nomination forms; this is a frequent compliance gap in smaller companies.

Fixed-Term Employees Under the New Labour Code

This is the change most HR teams are still catching up on. Under the Code on Social Security, 2020 — notified for implementation on 21 November 2025 — fixed-term contract employees are now eligible for pro-rata gratuity after just 1 year of service. If you hired a fixed-term employee on a 2-year contract, they are entitled to gratuity when the contract ends. This is a material shift, particularly for manufacturing, logistics, and retail companies that rely heavily on fixed-term or contractual staff.

The Gratuity Calculation Formula Explained

There are two formulas depending on whether your organisation is covered under the Payment of Gratuity Act.

For Employers Covered Under the Gratuity Act (10+ employees)

Gratuity = (Last Drawn Basic + DA) × 15 × Years of Service ÷ 26

The “26” represents working days in a month (a four-week month minus Sundays). The “15” represents 15 days of salary per completed year of service. Only Basic Pay and Dearness Allowance are included in “salary” for this formula. HRA, special allowance, food allowance, mobile allowance — none of these count. This exclusion is enshrined in Section 2(s) of the Act and is the single most common error in manual gratuity calculations.

For Employers Not Covered Under the Act (<10 employees)

Gratuity = (Average Monthly Salary in Last 10 Months) × 15 × Years ÷ 30

Here, “30” represents all calendar days. This formula uses average salary over the last 10 months rather than just the final month. While gratuity is not mandatory for sub-10-employee establishments, many pay it as good HR practice — and should at least compute the right number.

Worked Example: Calculating Gratuity Step by Step

Priya has worked at a 50-employee garment manufacturer in Haryana for 9 years and 8 months. Her last drawn Basic + DA is ₹38,000 per month.

Step	Detail	Value
Last Drawn Basic + DA	Monthly salary component (HRA excluded)	₹38,000
Years of Service	9 years 8 months → rounds up to 10 (≥6 months rounds up)	10
Gratuity Formula	38,000 × 15 × 10 ÷ 26	₹2,19,231
Within ₹20 lakh cap?	Yes — ₹2,19,231 < ₹20,00,000	✓
TDS deduction	Below ₹20 lakh — fully tax-exempt under Section 10(10)	₹0

The rounding rule matters: 9 years 8 months becomes 10 years because 8 months exceeds 6. Had Priya had 9 years and 4 months, that would remain 9 years. A one-year difference changes her payout by ₹21,923 — not trivial. Run your calculations with the Gratuity Calculator to handle this automatically.

Gratuity Cap and Tax Exemption Under Section 10(10)

The maximum gratuity payable under the Payment of Gratuity Act is ₹20 lakh. Even if the formula produces a higher number for a long-serving senior employee, the statutory cap is ₹20 lakh. You may pay additional ex-gratia over and above this as a discretionary benefit, but it is not legally required.

For income tax, the exemption under Section 10(10) of the Income Tax Act works like this:

Employee Category	Tax-Exempt Limit	Amount Above Limit
Government employees	Fully exempt — no ceiling	N/A
Private sector, covered under Gratuity Act	₹20 lakh	Added to gross salary; taxed at applicable slab
Private sector, not covered under Act	Least of: actual gratuity, ½ month avg salary × years, or ₹20 lakh	Balance is taxable

If any of your senior employees have Basic + DA above ₹1.1 lakh/month with 15+ years of service, their gratuity could cross ₹9–10 lakh — and for those with 25+ years of service, the ₹20 lakh ceiling becomes a real planning consideration. Factor TDS into your Full & Final Settlement calculation well before the exit date.

What Changed Under the Code on Social Security 2020?

The Code on Social Security, 2020 was notified for implementation on 21 November 2025, replacing the standalone Payment of Gratuity Act 1972 as the governing law for new establishments. Here is what changed specifically on gratuity:

Aspect	Earlier (Gratuity Act 1972)	Now (Code on Social Security 2020)
Fixed-term contract eligibility	5 years of service required	1 year of continuous service
Basic wage definition	Not codified — led to structuring abuses	Basic must be ≥50% of gross CTC
Payment timeline	30 days from due date	30 days — reaffirmed and enforceable
Maximum statutory cap	₹20 lakh	₹20 lakh (unchanged)

The 50% wage floor is the provision that will quietly affect the most companies. If your salary structures have kept Basic at 30–35% of CTC to reduce PF and gratuity outgo, those structures are no longer compliant under the new Code. Higher basic means higher gratuity provisioning. Make sure your payroll software is reflecting the correct wage definition — EZHRM’s payroll management module already factors in the updated Code on Wages norms. And for the broader compliance picture, check the full suite of free HR calculators to audit your payroll components.

What HR Managers Get Wrong on Gratuity

Including HRA or allowances in the salary base. This is the most common calculation error. Only Basic + DA enters the formula. HRA, special allowance, medical allowance, and incentives are fully excluded. A ₹25,000 HRA inclusion can inflate gratuity by ₹50,000–₹1 lakh on a 10-year tenure — a meaningful difference.

Not rounding up the final partial year. Six months or more in the last year rounds up to a full year. Paying on an unrounded figure shortchanges the employee and creates legal exposure. Courts have consistently upheld the rounding-up principle.

Assuming the company is not covered. If your business grew from 8 to 12 employees — even briefly — the Gratuity Act applied from the day you crossed 10. It does not de-apply when you fall back below 10. Many small businesses discover this only when an aggrieved employee files a claim.

Missing fixed-term employees post-November 2025. Many companies are still processing fixed-term contract closures without including gratuity. Under the Code on Social Security 2020, this is non-compliant for employees who have completed 1 year.

Delaying payment beyond 30 days. Interest accrues on delayed gratuity. A delay of 6 months on a ₹2 lakh gratuity amount at the applicable government rate can add several thousand rupees to your payout — plus the administrative cost of managing a complaint.

Calculating gratuity in isolation. Gratuity is one piece of the FnF puzzle. It interacts with leave encashment (use the Leave Encashment Calculator), notice period recovery (use the Notice Period Recovery Calculator), and TDS treatment. Running these separately increases the chance of a net-pay error that the employee disputes.

Frequently Asked Questions on Gratuity in India

Is gratuity mandatory for all companies in India?

Yes — for every establishment with 10 or more employees, compliance with the Payment of Gratuity Act 1972 (now absorbed into the Code on Social Security 2020) is mandatory. Once the threshold is crossed, coverage is permanent. Non-compliance attracts imprisonment of up to 2 years or a fine of up to ₹20,000, or both, under Section 9 of the Act. You can find the official Act text on the Ministry of Labour and Employment website.

What happens if an employee resigns before completing 5 years?

Gratuity is not payable on resignation before 5 years of continuous service — with two exceptions: death and disablement. However, under the Code on Social Security 2020, fixed-term employees who have completed at least 1 year are now entitled to pro-rata gratuity at the end of their contract term, regardless of whether they “resigned” or the contract simply ended.

Is gratuity included in CTC?

Most companies include a gratuity provision in CTC — typically 4.81% of Basic salary, which is the annualised equivalent of the 15/26 formula. However, showing gratuity in CTC is a cost provision for the employer, not a right the employee can claim before completing 5 years. Use the CTC Salary Calculator to model how gratuity provisioning affects take-home pay and employer cost simultaneously.

What is the deadline for paying gratuity after an employee exits?

The employer must pay gratuity within 30 days of it becoming due — counted from the employee’s last working day, or from the date of their written application, whichever is later. Beyond 30 days, interest at the government-prescribed rate is payable. If there is a genuine dispute on the quantum, the employer should still pay the undisputed portion within 30 days.

Can an employer forfeit gratuity?

Yes — under Section 4(6) of the Payment of Gratuity Act, forfeiture is permitted if the employee’s services were terminated for wilful omission causing loss or damage to employer property, or for misconduct involving moral turpitude. Partial forfeiture is also possible. This is a last resort and must be backed by a proper inquiry — not used casually as a retention or exit tactic.

How is gratuity taxed in the hands of the employee?

For private sector employees covered under the Payment of Gratuity Act, gratuity up to ₹20 lakh is fully exempt under Section 10(10) of the Income Tax Act. Anything above ₹20 lakh is added to gross salary income and taxed at the applicable slab rate. Government employees enjoy full exemption with no ceiling. The ₹20 lakh limit has been in force since 2018 — check the Income Tax India portal for the latest notifications if you have an employee approaching this threshold.

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Gratuity is one of those calculations where a small error — wrong salary base, missed rounding, overlooked fixed-term staff — turns into a compliance notice or an unhappy ex-employee. EZHRM’s Gratuity Calculator gives you the right number in seconds, and if you want the entire FnF — gratuity, leave encashment, notice recovery, and TDS — handled automatically, EZHRM’s payroll platform has you covered. For more practical HR and payroll guides written for Indian SMEs, browse our HR blog.