- Gratuity = last monthly basic + DA × 15 ÷ 26 × years of service. On ₹50,000 basic and 10 years, that is ₹2,88,462.
- Most employees need five years of continuous service. At 4 years 11 months, the payout under the Act is zero.
- A part-year of more than six months counts as a full year. 7 years 7 months pays for 8 years.
- Since 21 November 2025, the labour codes say gratuity “wages” must be at least 50% of total pay, and fixed-term employees qualify after one year.
- Up to ₹20 lakh is tax-free for private-sector employees.
Gratuity is a thank-you payment for long service, and it is written into law: the Payment of Gratuity Act, now folded into the new Code on Social Security. Your employer sets money aside for it every year, which is why it shows up in your CTC, but you see none of it until you leave.
That makes gratuity the one part of your pay where the date you resign can matter as much as the amount you earn.
The formula, and why it uses 26
For employees covered by the Act (most companies with 10 or more people):
Gratuity = last monthly wage × 15 ÷ 26 × years of service
“Wage” means basic pay plus dearness allowance, not your full salary. The 15 ÷ 26 part means 15 days of pay for every year worked, taking a month as 26 working days.
The 5-year cliff
Under the Act, you need five years of continuous service before gratuity is payable on resignation. There is no partial payment for 4.9 years. It is all or nothing.
If you are close to five years and planning to move, check your exact joining date before you put in your papers. A notice period that runs past the five-year mark usually counts as service.
Check how close you are →What about “4 years 240 days”? Some court rulings have treated 4 years and 240 working days as five years of continuous service, because of how the Act defines continuous service. Employers don’t all apply it, and it depends on the facts, so don’t plan your exit around it without written confirmation from HR.
There are exceptions. If an employee dies or becomes disabled, gratuity is payable regardless of years served. And under the labour codes, fixed-term employees are now eligible after one year (more below).
The rounding rule: more than six months counts as a year
Once you are past five years, the formula counts a part-year of more than six months as a full year. That creates small cliffs every year:
| Service (₹50,000 basic) | Years counted | Gratuity |
|---|---|---|
| 7 years 5 months | 7 | ₹2,01,923 |
| 7 years 7 months | 8 | ₹2,30,769 |
Two months of extra service add ₹28,846. When you choose a last working day, it is worth checking which side of the six-month line it falls.
What changed with the new labour codes
The four labour codes took effect on 21 November 2025. Two changes matter for gratuity.
1. Wages must be at least half of your pay
Many companies kept basic pay low, often 30–40% of CTC, which also kept gratuity low. The codes define “wages” so that they cannot be less than 50% of total pay. If your basic is below that, your gratuity may be calculated on a higher figure.
How each company applies the rule, and from when, is still being worked out. Ask HR how your gratuity wage is calculated now.
Check the 50% rule for you →2. Fixed-term employees qualify after one year
If you are on a fixed-term contract, you no longer need five years. Gratuity is payable after one year, in proportion to the time worked. Two years on ₹50,000 basic comes to ₹57,692. Permanent employees still need five years.
Try a fixed-term contract →Is gratuity taxable?
For private-sector employees, gratuity is tax-free up to ₹20 lakh over your whole career. The Act also caps the amount an employer must pay at ₹20 lakh. Some employers pay more by their own policy; the extra above ₹20 lakh is taxed as salary.
You would only reach that cap with a long career and a high basic. For example, 25 years on a ₹2 lakh basic works out to ₹28.8 lakh by the formula, so ₹20 lakh would be payable under the Act.
If your employer is not covered by the Act, any gratuity they pay uses 15 ÷ 30 instead of 15 ÷ 26 and counts only completed years. Ten years on ₹50,000 then comes to ₹2,50,000.
Why your payslip shows a different number
Your CTC usually includes gratuity at about 4.81% of basic a year. That is an accounting provision, roughly 15 ÷ 26 ÷ 12. It is not money you have earned yet, and it is not paid if you leave before you qualify. The legal amount is always worked out from your last wage and your years of service on the day you leave.
Before you resign: a quick checklist
- Find your exact joining date and count your service to the last working day, including the notice period.
- If you are near 5 years, or near the six-month mark of any later year, check whether a short delay would change the payout.
- Ask HR what wage they use for gratuity now, given the 50% rule.
- Check that your nomination is up to date.
- After you leave, your employer should pay within 30 days of it becoming due, or pay interest.
Frequently asked questions
How is gratuity calculated in India?
For employees covered by the Act: last monthly basic plus DA × 15 ÷ 26 × years of service, with a part-year of more than six months counted as a full year. On ₹50,000 basic and 10 years, that is ₹2,88,462.
Can I get gratuity before 5 years?
Not on resignation if you are a permanent employee, unless your employer pays it by choice. Fixed-term employees qualify after one year under the new labour codes, and the five-year condition does not apply on death or disability.
Is gratuity calculated on CTC or basic?
On wages: basic pay plus dearness allowance. Under the new labour codes, wages cannot be less than 50% of your total pay, which can raise the base for people with a low basic.
Is gratuity taxable?
For private-sector employees, up to ₹20 lakh over a career is tax-free. Anything paid above that is taxed as salary.
Does the notice period count towards 5 years?
Generally yes, service until your last working day counts. Confirm your exact last day and service with HR.
How much gratuity have you built up?
Enter your basic and service, and see what staying longer would add.
Open the gratuity calculator →Based on the Payment of Gratuity Act and the labour-code rules as understood in October 2026, Tax Year 2026-27. How companies apply the new wage definition is still settling. Confirm with your employer or a labour-law professional.