Gratuity Formula India 2026: 15/26 Rule, ₹20L Limit & Tax

TL;DR Summary

Gratuity is a lump sum your employer pays for long service. Five continuous years is the general rule for permanent employees. Death, disability, and retrenchment are exceptions to the five‑year rule. The standard formula for covered employees is (Basic + DA) × 15 × years ÷ 26.“15/26” uses 26 working days per month and 15 days’ wage per year. Maximum statutory payment is ₹20 lakh. Your employer can pay more. Tax exemption under Section 10(10) is also capped at ₹20 lakh; anything above that is taxable. The ₹20 lakh exemption limit is lifetime cumulatively, not per job. Under the new Labor Code (2025), fixed‑term employees get gratuity after just one year. Use a reliable gratuity calculator to avoid mistakes.

Gratuity for Act-covered private sector employees in India is calculated as (Basic + DA) × 15 × completed years of service ÷ 26, where 15 is the days’ pay earned per year and 26 is the statutory working days per month — the maximum tax-exempt payout under Section 10(10) is ₹20 lakh (lifetime cumulative across all employers), with any amount above that taxable at your applicable slab rate.

Five continuous years of service are required for resignation or retirement, but the rule is fully waived on death or permanent disablement regardless of tenure; from November 2025, under the Code on Social Security, 2020, fixed-term employees qualify for pro-rata gratuity after just one year of service.

A gratuity calculator tells an employee exactly what an employer owes them. Most employees in India either overestimate or underestimate their gratuity, the right formula removes the guesswork.

This PKC guide covers everything from the 5‑year rule and the 15/26 logic to tax exemption and the new Labour Code 2025. You will also learn how death, disability, or resignation before five years affects payout.

What Is Gratuity and When Does Your Employer Owe It?

Gratuity is a lump-sum payment your employer makes when your employment ends. It’s a legal obligation. The government makes this mandatory under the Payment of Gratuity Act, 1972, now incorporated into the Code on Social Security, 2020, which came into effect on November 21, 2025.

Not every office is covered. The Act applies to factories, mines, oilfields, plantations, ports, railway companies, and any shop or establishment with 10 or more employees on any day in the last twelve months.

If your workplace meets that number once, it stays covered even if employee count later drops below ten. Central government has also notified specific entities like motor transport undertakings, clubs, chambers of commerce, and trusts under the Act

When does gratuity become payable?

Retirement or superannuation
Resignation after completing the minimum required service period
Death or disablement due to accident or disease (the 5-year rule is waived in these cases)
Termination of employment

Who qualifies?

To be eligible, you must:

Have completed at least 5 years of “continuous service “with the same employer (for resignation or retirement)
Be employed in a covered establishment (10+ employees)
Not be an apprentice

What counts as continuous service?

A critical nuance is what counts as “continuous service.” You do not need to be physically at work every single day.

Continuous service includes authorised leave: earned leave, medical leave, maternity leave, and lay-off periods.

Under Section 2A of the Act, you are deemed to be in continuous service for one year if you have worked for 240 days in a 12-month period (or 190 days for establishments that operate less than six days a week).

This becomes when you are close to completing five years but not quite there.

Can your employer withhold gratuity?

Yes, in limited circumstances. An employer can forfeit gratuity either fully or partly if your services were terminated due to:

Wilful omission or negligence causing damage or loss to the employer’s property
Riotous or violent conduct
An offence involving moral turpitude

Forfeiture requires a formal process and is open to legal challenge. It’s not a decision an employer can make unilaterally on the spot.

One more point worth knowing: the employer bears the entire cost of gratuity. You contribute nothing toward it.

The 5-Year Rule — and the Exceptions No One Tells You

Under Section 4(1) of the Payment of Gratuity Act, an employee needs 5 years of continuous service to claim gratuity on resignation or retirement.

But there are exceptions to this rule:

The 240-Day Rule

Section 2A of the Act defines “continuous service.” Under this provision, an employee who has worked at least 240 days in a 12-month period is deemed to have completed one full year of service.

For establishments with a 5-day workweek, the threshold is 190 days.

So, if an employee is on a 6-day workweek and resigns after 4 years and 8 months (approximately 240 days in the fifth year), you may have a valid gratuity claim.

Rounding of partial years

When counting years of service for the gratuity formula:

6 months or more remaining → rounds up to the next full year
Less than 6 months → excluded

So 10 years and 7 months = 11 years for calculation purposes. 10 years and 4 months = 10 years.

Death and disability

If an employee dies or is permanently disabled due to an accident or disease, the 5-year rule is completely waived.

Gratuity is paid regardless of how long the person served. No five-year condition. No proration.

New labor codes

The Code on Social Security, 2020 (not fully implemented yet, but progressing) introduces eligibility for fixed-term employees after one year of continuous service, on a pro-rata basis.

If you are hired on a fixed-term contract for a specific project, you may become eligible for gratuity much sooner than the traditional five-year window.

Gratuity Formula: Act Covered vs Not Covered

The formula you use depends entirely on whether your employer is covered under the Payment of Gratuity Act, 1972.

Most private employees fall under the “covered” category, but not everyone. Knowing what’s applicable to you, changes the final number.

Factor	Act-Covered	Not Act-Covered
Formula divisor	26	30
Legal obligation	Mandatory	Based on company policy
Tax exemption (Section 10(10))	Up to ₹20 lakh	Up to ₹20 lakh (different basis)
Partial year (last year)	6+ months = 1 year	Typically excluded

Covered under the Act (employers with 10 or more employees)

If your establishment has ten or more employees on any day in the preceding twelve months, the Act applies. This includes most factories, mines, shops, offices, and commercial establishments. Once covered, the employer stays covered forever, even if the headcount later drops below ten.

The formula is:

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

“Last Drawn Salary”= Basic Pay + Dearness Allowance (DA)

Components like HRA, bonuses, commissions, and special allowances are excluded.

For employees not covered under the Act

Smaller establishments — typically those with fewer than 10 employees — fall outside the Act. Gratuity here is contractual rather than statutory. The commonly used formula is:

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

If your employer has fewer than ten employees, the Act does not apply. However, many such employers still pay gratuity voluntarily as a company policy or per their employment contract.

The formula in this case:

Gratuity = (Average salary of last 10 months) × 15 × Years of service ÷ 30

The gap between the two formulas is significant. For an employee with 10 years of service and a last drawn salary of ₹50,000, the difference:

Covered employer (÷26): (50,000 × 15 × 10) ÷ 26 = ₹2,88,462
Non-covered employer (÷30): (50,000 × 15 × 10) ÷ 30 = ₹2,50,000

That is a difference of nearly ₹38,500, or 13% lower for the non-covered employee.

Government employees Gratuity

Central and state government employees do not use either of these formulas. Their gratuity is calculated under the Central Civil Services (Pension) Rules or similar state rules, usually as one-fourth of monthly emoluments for each completed six-month period, capped at 16.5 times the monthly pay. That is a separate regime entirely.

The 50% Wage Rule, new from November 2025

The Code on Social Security, 2020 introduces a wage floor: basic wages must constitute at least 50% of total CTC for statutory calculations including gratuity.

If a salary structure keeps the basic component artificially low to reduce gratuity and PF liability, the excess allowances are factored back into the wage base.

This increases the calculation base and the resulting gratuity amount for employees whose employers had used such structures.

What Is 15/26? The Logic Behind the Formula

The fraction 15/26 is the core of every gratuity calculation in India. They are not random. Each digit serves a clear purpose.

Why 26?

A month has 30 or 31 days. But for calculating daily wages, the government assumes there are 26 working days in a month. The remaining 4 or 5 days are considered weekly rest days (Sundays or other off days)

The Act excludes Sundays from the calculation denominator because you do not earn wages for those days. So 26 days is the fair denominator for your daily pay.

Why 15?

For every completed year of service, an employee earns 15 days’ salary as gratuity. That’s exactly half a month’s pay. The principle being that your employer sets aside half a month’s wages for each year you’ve served.

Half of 26 working days is 13 days, but the law uses 15 instead of 13. The multiplier 15 includes the 13 days of actual work plus 2 days of paid leave or rest days as a small cushion for the employee. It ensures that the gratuity amount is meaningful, not just a mechanical half-month calculation.

Breaking it down numerically

If your last drawn salary (Basic + DA) is ₹50,000 per month:

Daily wage = ₹50,000 ÷ 26 = ₹1,923
15 days’ equivalent = ₹1,923 × 15 = ₹28,846 per year of service
For 10 years: ₹28,846 × 10 = ₹2,88,462

Using the formula directly: (50,000 × 15 × 10) ÷ 26 = ₹2,88,462

The 15/26 ratio is fixed by law. It doesn’t vary based on actual salary, industry, or number of years worked. It’s the constant that makes the calculation uniform across all covered employers in India.

IMPORTANT:

The 15/26 formula applies to monthly rated employees. If you are piece-rated or work in a seasonal establishment, the calculation differs.

For seasonal workers, gratuity is at the rate of seven days’ wages per season, not fifteen days.

Worked Examples: 3 Scenarios with Different Tenures

Let’s take a look at three different scenarios and how the gratuity will be calculated here.

These examples assume the employer is covered under the Payment of Gratuity Act, 1972, so the formula is:

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

15/26 = 15 days’ wages per year of service (treating a month as 26 working days).
Years of service rounded to nearest full year: 6+ months → round up; less than 6 months → round down.
Tax exemption under Section 10(10) : For Act-covered employees, gratuity is exempt up to ₹20 lakh. Excess is taxable as salary.

Scenario 1: Mid-career employee, 10 years of service

Last drawn Basic + DA: ₹60,000/month
Years of service: 10 years and 4 months → counted as 10 years (less than 6 months remaining)
Employer covered under the Act

Gratuity = (60,000 × 15 × 10) ÷ 26 = ₹3,46,154

This is well within the ₹20 lakh tax-exempt ceiling. The full amount is tax-free under Section 10(10).

Scenario 2: Senior employee, 25 years of service

Last drawn Basic + DA: ₹1,20,000/month
Years of service: 24 years and 8 months → rounded up to 25 years (8 months ≥ 6 months)
Employer covered under the Act

Gratuity = (1,20,000 × 15 × 25) ÷ 26 = ₹17,30,769

Still below the ₹20 lakh limit. Fully tax-exempt.

Scenario 3: High-salary employee where gratuity exceeds ₹20 lakh

Last drawn Basic + DA: ₹2,00,000/month
Years of service: 20 years exactly
Employer covered under the Act

Gratuity = (2,00,000 × 15 × 20) ÷ 26 = ₹23,07,692

The ₹20 lakh cap applies here. ₹20,00,000 is exempt from tax. The remaining ₹3,07,692 is added to income from salary and taxed at the applicable slab rate.

Summary table:

Scenario	Basic + DA	Service	Gratuity	Tax-Exempt	Taxable
1 – 10 years	₹60,000	10 yrs	₹3,46,154	₹3,46,154	Nil
2 – 25 years	₹1,20,000	25 yrs	₹17,30,769	₹17,30,769	Nil
3 – 20 years	₹2,00,000	20 yrs	₹23,07,692	₹20,00,000	₹3,07,692

Remember, the actual tax treatment may vary based on individual circumstances.

Maximum Gratuity Limit in 2026 — ₹20 Lakh Rule

The exemption limit under Section 10(10)(ii) for employees covered under the Payment of Gratuity Act, 1972, was enhanced from ₹10 lakhs to ₹20 lakhs in March 2018.

As of 2026, this limit has not been revised further. The same ₹20 lakh ceiling applies under the Code on Social Security, 2020.

How the cap works

The ₹20 lakh ceiling governs two things: the statutory maximum an employer is required to pay, and the maximum tax-exempt amount for private sector employees.

If the formula produces a higher number, your employer can still pay the full calculated amount. The cap doesn’t restrict the actual payment, it restricts the tax exemption.

Gratuity up to ₹20 lakh → fully tax-free
Amount above ₹20 lakh → taxable as income from salary, at your applicable slab rate

The lifetime cap, frequently missed

The total lifetime exemption across all employers is capped at ₹20 lakh.

For example, if you claimed ₹8 lakh exemption from a previous employer and later receive ₹15 lakh gratuity from a new employer, only ₹12 lakh (₹20L − ₹8L) is exempt. The remaining ₹3 lakh is taxable.

This is a detail many employees overlook when they switch jobs multiple times across a career.

Government Employees

For government employees, there is no maximum monetary limit. The full gratuity amount is tax-free.

Central and state government employees, local authority employees, and defence personnel all receive full exemption, regardless of the amount.

Can the limit be revised?

Yes. The Central Government can revise the ceiling by notification. It doesn’t require a Parliamentary amendment.

The 2018 increase from ₹10 lakh to ₹20 lakh was done exactly this way. Any future revision would take effect from the date of the notification, not retroactively.

Is Gratuity Taxable? Exemption Under Section 10(10)

Gratuity is not automatically tax-free. Gratuity is partially exempt. You do not pay tax on the entire amount.

The extent of exemption depends on your employment category. Three categories. Three different treatments.

Employee Type	Tax Exemption Basis
Government employee	Fully exempt, no cap
Private, Act-covered	Least of: actual, ₹20L, or 15/26 formula
Private, not Act-covered	Least of: actual, ₹20L, or ½ × 10-month avg salary × years

Category 1: Government Employees

Government employees which include central, state, local authorities, and defence services receive full tax exemption.

Their gratuity is fully exempt from tax under Section 10(10)(i). No upper limit applies. No calculation needed. If you are a government servant, the entire gratuity amount is tax‑free.

Category 2: Private Sector Employees Covered Under the Act

It is covered under Section 10(10)(ii). The exempt amount is the least of these three:

Actual gratuity received
₹20 lakh (the statutory ceiling)
Amount as per the formula: (15/26) × Last Drawn Salary × Completed Years

In most cases where the employer pays exactly what the formula dictates and the amount is below ₹20 lakh, the full gratuity is tax-free. The “least of three” comparison only becomes relevant when the employer voluntarily pays more than the formula amount.

Category 3: Private Sector Employees Not Covered under the Act

In this case, the exempt amount is the lowest of:

Actual gratuity received
₹20 lakh
Half a month’s average salary × completed years of service (based on average of last 10 months’ salary)

Note that for this category, average salary over the last 10 months is used, not the last drawn salary.

TDS Implications

Your employer deducts TDS only on the taxable portion of gratuity, the amount that exceeds the applicable exemption.

If your gratuity is within the exempt limit, no TDS is deducted. Report the exempt amount under “Income Exempt under Section 10” when filing your ITR.

Available in Both Tax Regimes

You do not lose the Section 10(10) exemption if you opt for the new tax regime.

Unlike deductions like 80C, this retirement‑related exemption is available regardless of whether you choose the old regime or the new one.

Relief for Excess Taxable Gratuity

If a large gratuity payout pushes your total income into a higher tax bracket in a single year, you can file Form 10E to claim relief under Section 89(1).

This provision allows you to spread the tax burden over previous years, preventing a sudden spike in your tax liability

What About Interest on Delayed Payment?

If your employer delays your gratuity beyond 30 days, any interest they pay for that delay is fully taxable under “Income from Other Sources.” It does not get the exemption under Section 10(10).

IMPORTANT: The ₹20 lakh exemption limit under Section 10(10) is cumulative across your entire career, not per job. If you have already claimed exemption on ₹12 lakh of gratuity from your first employer, your remaining lifetime tax‑free capacity is only ₹8 lakh. Any gratuity you receive from subsequent employers beyond that cumulative ₹20 lakh is fully taxable.

Gratuity on Death, Disability or Resignation Before 5 Years

The gratuity rule changes in a few situations:

Situation	Gratuity Payable?	5-Year Rule Applies?
Retirement / superannuation	Yes	Yes
Resignation (5+ years)	Yes	Yes
Resignation (4 yrs + 240 days)	Likely (jurisdiction-dependent)	Waived by judicial interpretation
Resignation before 5 years	No	Yes
Death in service	Yes	No, waived
Permanent disablement	Yes	No, waived

Death of an employee while in service

Section 4(1) of the Payment of Gratuity Act includes a provision that explicitly states: the completion of five years of continuous service is not necessary where termination is due to death or disability.

When an employee dies while in service, regardless of how long they’ve worked, the 5-year rule is completely waived.

Gratuity is paid to the registered nominee. If no nomination exists, it goes to the legal heirs.

If the employee was covered under the Payment of Gratuity Act, the gratuity exemption applies up to ₹20 lakh, making it fully tax-free within this limit. For nominees or heirs receiving the amount, it is treated as income from other sources but remains exempt from tax up to the specified threshold.

Employees must nominate someone to receive your gratuity using Form F. This nomination must be made within 30 days of completing one year of service.

Only family members can be nominated: spouse, children (minor or major, married or unmarried), dependent parents, and dependent parents of the spouse. Employees can nominate multiple people and assign specific percentages to each.

Without a valid nomination, processing delays are common and disputes can arise.

Disablement, permanent disability due to accident or illness

Permanent disablement due to an accident or disease follows the same logic as death. The 5-year minimum is waived.

Gratuity is paid directly to the employee, calculated on actual years served using the standard 15/26 formula, subject to the ₹20 lakh ceiling.

What qualifies as “permanent disablement”? The Act does not give an exhaustive list, but courts have interpreted it as a condition that permanently reduces your capacity to do your job. A temporary injury that heals in a few months does not count.

A permanent loss of eyesight, paralysis, or permanent mental incapacity would qualify.

Resignation before 5 years

In most cases, there is no gratuity. The law outlines that if you resign before 5 years of continuous service, the entitlement doesn’t exist.

The exception is the 4-year + 240-day rule discussed above. If you’ve worked 240 or more days in the fifth year, courts have held you eligible. That interpretation, while widely followed, is not universally applied.

There is no provision for pro-rata gratuity for permanent employees who resign before 5 years. That benefit is specific to fixed-term employees under the new Labour Code (see H2 9).

Practical Checklist for Employees

Submit Form F nomination within 30 days of completing one year. Update it whenever the family situation changes (marriage, birth of a child, death of a nominee).
If resigning close to the five‑year mark, check your working days in the fifth year. At 240 days, you might be eligible under judicial interpretation.
If permanently disabled, file claim immediately. The five‑year condition does not apply.
Update nominee details regularly. Without a valid nomination, your family will face legal delays in claiming your gratuity.
If an employer refuses to pay gratuity on death or disability, file a complaint with the Labour Commissioner. The Act has penalty provisions for delayed or wrongfully withheld payments.

New Labor Code 2025: Fixed-Term Employees Eligible After 1 Year

The four Labour Codes in India became legally effective from November 21, 2025.

For gratuity specifically, the most significant change affects fixed-term and contractual workers.

What changed?

Under Section 53 of the Code on Social Security, 2020, the government reduced the eligibility requirement for gratuity for Fixed Term Employees (FTEs) from five years to one year.

If you complete one year of continuous service, you qualify for gratuity on a proportionate basis. For example, if you work for 18 months as a fixed-term employee, you will receive gratuity calculated for 1.5 years of service.

Previously, fixed-term workers in sectors like IT, manufacturing, and consulting, where 5-year contracts are rare, effectively received no gratuity. That gap is now closed, at least at the central level.

What is a fixed-term employee?

The Code defines fixed-term employment as engagement based on a written contract for a defined period.

The law doesn’t set a minimum or maximum contract length, though draft rules indicate the minimum service for eligibility is 1 year.

How is the gratuity calculated?

The formula stays the same. Gratuity is calculated on a pro-rata basis for partial service years.

Example: A fixed-term employee with 21 months of service (1.75 years) earning ₹30,000/month (Basic + DA):

Gratuity = (30,000 × 15 × 1.75) ÷ 26 = ₹30,288 (approx.)

Under the old law, this employee would have received nothing.

The 50% Wage Rule

Under the Code on Social Security, 2020 the 50% wage rule requires basic wages to be at least 50% of total CTC for statutory calculations.

Employers who had structured salaries with low basic pay to reduce gratuity and PF obligations now need to review those structures.

State-level implementation

Labour is a concurrent subject..States are still finalising their individual rules, which means enforcement may be uneven in some regions.

However, the legal obligation exists at the central level. Employers who defer compliance are taking on potential retrospective liability.

Fixed-term employees whose contracts expired on or after November 21, 2025, and who have completed 1 year of service, are entitled to claim gratuity.

PKC Tax & Payroll Compliance Advisory

Established in 1988, PKC Management Consulting is a multi-disciplinary professional services firm serving clients across India from startups to MNCs.

What PKC offers for gratuity and payroll compliance:

PKC provides advisory services on the Payment of Gratuity Act and the Code on Social Security, 2020, including:

Gratuity calculation and verification: Computes gratuity using the correct legal formula and verifies eligibility and payout accuracy.
Employer compliance support: Assists businesses with gratuity registration, liability calculations, approved gratuity funds/group schemes, and timely statutory payments.
Tax advisory on gratuity exemption: Advises on tax-free gratuity limits under Section 10(10), the ₹20 lakh lifetime exemption cap, and Form 10E/Section 89(1) relief.
Labour law compliance updates: Helps businesses stay compliant with changes under the Labour Codes, GST, Income Tax, Company Law, and Labour Laws through webinars and WhatsApp updates.
Payroll restructuring advisory: Supports salary restructuring to align with the 50% wage-definition requirement while balancing compliance and tax efficiency.

Why PKC’s approach is different:

PKC does not just file forms and send invoices. We focus on your business growth.

Our management consulting services offer solutions to operational problems like inadequate systems, ERP challenges, cost optimization, and employee productivity improvement.
Our audit practice ensures adequate management controls.
Our tax advice is not just about saving money but about adopting the right structures to grow your business while avoiding legal hassles

Want to know more? Schedule a free 30-minute consultation

FAQs

Q1: How is gratuity calculated for private sector employees?

For private sector employees covered under the Payment of Gratuity Act (now Code on Social Security, 2020). The formula is: Gratuity = (Last Drawn Salary × 15 × Completed Years of Service) ÷ 26. The 15 represents 15 days’ salary per year of service, and 26 is the standard working days in a month under the Act. For employers not covered under the Act, the divisor changes from 26 to 30, yielding a slightly lower payout.

Q2: Is gratuity paid if I resign before 5 years?

Generally, no. Gratuity requires a minimum of 5 years of continuous service for resignation. The one recognized exception is the 240-day rule. Multiple High Courts have held that completing 4 years and 240 or more working days in the fifth year satisfies the 5-year requirement under Section 2A of the Act.

Q3: What is the maximum gratuity amount in 2026?

The statutory ceiling and the maximum tax-exempt limit for private sector employees under Section 10(10)(ii) is ₹20 lakh. This was raised from ₹10 lakh on 29 March 2018, and has not been revised as of 2026. Government employees have no upper cap, their gratuity is fully tax-exempt regardless of the amount.

Q4: Is the gratuity amount fully tax-free?

For private sector employees, gratuity is tax-free up to ₹20 lakh under Section 10(10) of the Income Tax Act. Any amount above this is taxable as salary income at your slab rate. This ₹20 lakh limit is a lifetime cap across all employers. Government employees receive full exemption with no ceiling.

Q5: What happens to gratuity if an employee dies before 5 years?

The 5-year rule is waived entirely in the event of death. Gratuity is paid to the registered nominee, or to legal heirs if no nomination exists. The amount is calculated based on actual years served using the standard formula. For nominees and heirs, the amount is treated as income from other sources but remains tax-exempt within the ₹20 lakh ceiling under Section 10(10).

Q6: What does 15/26 mean in the gratuity formula?

The 15 represents 15 days’ wages, your gratuity accrual for one full year of service. The 26 represents the number of working days in a month under the Act, excluding Sundays. Together, 15/26 is the per-year multiplier applied to your last drawn Basic + DA. Using 26 instead of 30 (which is used for non-Act employers) produces a higher daily wage value, and therefore a higher payout.

Q7: Are contract employees eligible for gratuity in 2026?

Yes, for fixed-term employees, under the Code on Social Security, 2020, effective November 21, 2025. Fixed-term workers are now eligible for pro-rata gratuity after completing 1 year of continuous service. The formula remains the same (15/26), applied proportionally. Regular permanent employees still require 5 years. State-level implementation rules are still being finalised in some states, but the legal entitlement exists at the central level from the effective date.