Last month, an HR manager at a 60-person manufacturing unit in Faridabad called me in a mild panic. An employee who’d resigned after 6 years and 9 months was disputing his gratuity payout — HR had rounded his service down to 6 years, he wanted it rounded up to 7. Neither side was calculating it correctly, and the ₹18,000 difference nearly went to a labour court notice.

This happens more often than most HR teams admit. The gratuity formula looks simple on paper — 15 days’ wages for every completed year of service — but the moment you introduce fixed-term contracts, seasonal workers, mid-year resignations, or the new labour code changes, the “simple” formula throws up five different answers depending on who’s calculating it. If you’re an HR manager in India running payroll for a growing team, getting this wrong isn’t just an awkward conversation — it’s a compliance risk.

This guide walks through exactly how to calculate gratuity correctly in 2026, with five real payout scenarios you’ll actually encounter, so you (and your team) stop guessing and start using a proper gratuity calculator with confidence.

TL;DR — Gratuity in 2026, in Brief

Formula: (Last drawn wages × 15 × completed years of service) ÷ 26.
Eligibility: 5 years of continuous service for regular employees; just 1 year for fixed-term employees under the new labour codes; no minimum service if death or disablement caused the exit.
Tax exemption: Up to ₹20 lakh is tax-free for private sector employees under Section 10(10) of the Income Tax Act — it’s a lifetime cumulative limit, not a per-employer one.
Payment deadline: Employers must determine and pay the gratuity amount within 30 days of it becoming due, or pay simple interest on the delay.

What Is Gratuity, Really?

Gratuity is a statutory lump-sum benefit an employer pays an employee as a reward for continuous, long-term service, governed by the Payment of Gratuity Act, 1972 (now folded into the Code on Social Security, 2020, following the 2025 labour code rollout). It isn’t a bonus, and it isn’t optional for eligible employers — any establishment with 10 or more employees is covered, whether or not that number later drops.

Who Is Eligible in 2026

The eligibility picture changed meaningfully with the new labour codes, notified on 21 November 2025:

Regular employees: still need 5 years of continuous service, except on death or permanent disablement, where the 5-year condition is waived entirely.
Fixed-term employees: now eligible after just 1 year of service under their contract — a big shift from the old 5-year rule, and one a lot of HR teams in IT, retail, and manufacturing are still catching up on.
Seasonal establishment workers: eligible at 7 days’ wages per season for each completed year, rather than the standard 15-day formula.

The Gratuity Formula: 15/26 Explained

For most employees, gratuity is calculated as:

Gratuity = (Last drawn basic + DA) × 15 × number of completed years of service ÷ 26

The “26” represents the assumed working days in a month; the “15” is the number of days’ wages paid per year of service. A service period of more than 6 months in the final year is rounded up to the next full year — this is exactly where the Faridabad dispute I mentioned earlier went wrong.

5 Real Gratuity Payout Scenarios for 2026

Formulas are easier to trust when you see them applied. Here are five scenarios HR managers actually deal with, run through the correct calculation.

Scenario 1: Resignation after 6 years 9 months

Basic + DA: ₹35,000/month. Since 9 months exceeds the 6-month threshold, service rounds up to 7 years.

Gratuity = 35,000 × 15 × 7 ÷ 26 = ₹1,41,346

Scenario 2: Retirement after 22 years

Basic + DA: ₹52,000/month, exact 22 years of service.

Gratuity = 52,000 × 15 × 22 ÷ 26 = ₹6,60,000. Fully tax-exempt, since it’s well within the ₹20 lakh cap.

Scenario 3: Fixed-term employee, 16 months on contract

Under the old rules, this employee would get nothing. Under the Code on Social Security, they cross the 1-year threshold and are eligible on a proportionate basis. Basic + DA: ₹28,000/month, 1 completed year counted.

Gratuity = 28,000 × 15 × 1 ÷ 26 = ₹16,154

Scenario 4: Death in service after 3 years

The 5-year rule doesn’t apply here. Basic + DA: ₹40,000/month, 3 years of service, paid to the nominee.

Gratuity = 40,000 × 15 × 3 ÷ 26 = ₹69,231, and it’s fully tax-free in the nominee’s hands regardless of the ₹20 lakh limit.

Scenario 5: Seasonal factory worker, 4 seasons

Seasonal establishments use 7 days’ wages per season instead of 15. Daily wage: ₹800, 4 completed seasons.

Gratuity = 800 × 7 × 4 = ₹22,400

Scenario	Service	Formula Used	Payout
Resignation	6 yrs 9 mo (→7 yrs)	15/26 standard	₹1,41,346
Retirement	22 yrs	15/26 standard	₹6,60,000
Fixed-term contract	16 months	15/26, 1-yr eligibility	₹16,154
Death in service	3 yrs	15/26, no min. service	₹69,231 (tax-free)
Seasonal worker	4 seasons	7 days/season	₹22,400

Running these by hand for a handful of exits is manageable. Running them across 50 or 200 employees with different join dates, wage revisions, and exit types is where manual spreadsheets fall apart — which is exactly why we built a free gratuity calculator that handles the rounding and eligibility checks automatically.

Tax on Gratuity: The ₹20 Lakh Rule

Under Section 10(10) of the Income Tax Act, gratuity received by a private-sector employee is exempt up to ₹20 lakh. A few things HR teams routinely get wrong here:

This ₹20 lakh limit is cumulative across an employee’s lifetime, not a fresh quota at every employer. If someone already claimed ₹5 lakh in exemption at a previous job, only ₹15 lakh remains tax-free going forward.
Government employees have no upper monetary cap on exemption under Section 10(10)(i) — the entire amount is tax-free.
Gratuity paid due to death or permanent disablement is 100% tax-free, irrespective of the ₹20 lakh ceiling.
Any amount paid above the exemption limit is taxed as salary income in the employee’s hands, and this should reflect correctly in Form 16.

For the government’s own explanation of exemption rules, see the Income Tax Department’s official portal.

What HR Managers Get Wrong

Rounding the wrong way. Service above 6 months in the final year rounds up; below 6 months rounds down. Teams often round down out of caution, underpaying employees.
Forgetting fixed-term employees entirely. Many payroll teams still apply the old 5-year rule to contract staff, missing the new 1-year eligibility under the labour codes.
Using gross salary instead of basic + DA. Gratuity is calculated only on basic pay and dearness allowance — not HRA, bonus, or other allowances.
Missing the 30-day payment deadline. Once gratuity becomes due, employers must determine the amount and pay within 30 days, or interest accrues on the delayed amount.
Not linking gratuity to the full and final settlement. Gratuity is one component of F&F, not a substitute for leave encashment, notice pay, or other dues.

Gratuity Payment Checklist for HR Teams

Confirm the employee’s exit type — resignation, retirement, termination, death, or disablement.
Verify continuous service and check the correct eligibility threshold (5 years, 1 year for fixed-term, or none for death/disablement).
Pull the last drawn basic + DA, not gross salary.
Apply the correct rounding rule for the final year of service.
Run the calculation through a gratuity calculator to cross-check manual math.
Check whether the payout crosses the ₹20 lakh cumulative exemption limit for that employee.
Issue Form L (notice of payment) and disburse within 30 days.
Reflect the correct taxable/exempt split in the employee’s Form 16.

Frequently Asked Questions

Is gratuity mandatory for companies with fewer than 10 employees?

No. The Payment of Gratuity Act (now under the Code on Social Security) applies to establishments with 10 or more employees on any day in the preceding 12 months. Once covered, the establishment stays covered even if headcount later falls below 10.

Can an employer deny gratuity for misconduct?

Yes, but only in specific cases — gratuity can be forfeited, wholly or partly, if the employee’s services were terminated for proven riotous conduct, violence, or an offence involving moral turpitude committed during employment. This requires due process, not a unilateral HR decision.

Do fixed-term employees really get gratuity after just 1 year now?

Yes. Under the labour codes notified in November 2025, fixed-term employees became eligible for gratuity after completing 1 year of their contract term, instead of the earlier 5-year requirement that applied to regular employees.

Is the ₹20 lakh gratuity exemption per job or for life?

It’s a lifetime, cumulative limit across all employers, not a fresh ₹20 lakh allowance every time you switch jobs. HR and payroll teams should account for any gratuity an employee has already received when computing the exempt portion.

What happens if an employer delays gratuity payment?

The employer is liable to pay simple interest on the delayed amount from the date it became due until actual payment, in addition to facing potential penal action under the Act for non-compliance.

Does gratuity apply to interns or probationers?

Interns on a formal internship (not an employment contract) are typically excluded. Probationers, however, are usually counted from their date of joining if their probation converts to confirmed employment, so service time during probation typically counts toward the 5-year threshold.

For more Indian HR compliance breakdowns like this one, browse the EZHRM blog, or explore related tools — the leave encashment calculator and notice period recovery calculator — to complete a full-and-final settlement correctly. You can also read more on how the labour codes affect statutory compliance directly from the Ministry of Labour & Employment.

Get It Right the First Time

Manually calculating gratuity for even a handful of exits a month is where rounding errors and eligibility mix-ups creep in — and those mistakes are exactly what turn into employee disputes or compliance notices. If you’d rather not do this math by hand every time someone resigns, retires, or completes their contract, try EZHRM’s free gratuity calculator, or browse all our free HR calculators built specifically for Indian payroll rules.