What gratuity is
Gratuity is a lump sum your employer pays as a reward for long service, usually when you resign, retire or are laid off — or to your nominee if you die in service. It was governed for decades by the Payment of Gratuity Act, 1972; from 21 November 2025 the same scheme continues under the Code on Social Security, 2020, one of the four new labour codes.
The gratuity formula
Employers covered by the law (establishments with 10 or more employees):
Gratuity = last drawn monthly (basic + DA) × 15 ÷ 26 × years of service
- 15 ÷ 26 represents 15 days' wages, treating a month as 26 working days.
- A final part-year of more than six months counts as a full year. 12 years 7 months counts as 13 years.
Example: ₹60,000 basic + DA and 12 years 7 months of service → 60,000 × 15 ÷ 26 × 13 = ₹4,50,000.
Employers not covered: half a month's average salary (of the last 10 months) for each completed year — 60,000 × 15 ÷ 30 × 12 = ₹3,60,000 for the same person, because the part-year is ignored and the divisor is 30.
Central government employees (CCS Pension Rules): one-quarter of emoluments for every completed six months of service, up to 16½ months' emoluments, with a ceiling of ₹25 lakh. With ₹60,000 emoluments and 25 years' service, that is 33 half-years × ₹15,000 = ₹4,95,000.
Who is eligible
- Permanent employees: at least 5 years of continuous service. The 5-year condition does not apply if employment ends because of death or disablement.
- Fixed-term employees: under the Code on Social Security, eligible after 1 year of service, on a pro-rata basis. Labour Ministry guidance indicates this applies to contracts from 21 November 2025; check how your employer applies it to existing contracts.
How much is tax-free
| Employee | Tax-free gratuity |
|---|---|
| Central/state government | Fully exempt |
| Private / PSU, covered by the law | Lowest of: actual gratuity, the 15/26 formula amount, and ₹20 lakh |
| Private, not covered | Lowest of: actual gratuity, ½ month's average salary × completed years, and ₹20 lakh |
The ₹20 lakh limit is a lifetime limit across all employers. Anything above it is taxed as salary.
Things that change your gratuity
- Your wage structure. Gratuity uses basic + DA only. Under the new labour codes, if allowances exceed half of total pay, the excess is treated as wages — which can raise the gratuity base for employees with a low basic.
- Last drawn salary. A promotion or increment just before you leave increases the whole amount.
- Payment deadline. Your employer must pay within 30 days of it becoming due; delays attract interest.
Plan how you will use the money: a lump sum is often parked in an SBI FD or, for retirees, the Senior Citizen Savings Scheme. Your provident fund is a separate benefit — see the EPF calculator.