How is gratuity calculated in India?

The formula

The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972 on 21 November 2025, and kept the formula: 15 days of wages for each completed year of service, with a month treated as 26 working days rather than 30. The pay used is your LAST-DRAWN monthly wages.

What changed is what “wages” means. It starts with basic pay plus dearness allowance, but it can no longer be less than half of all your pay. That is the same 50% rule that now decides your PF, and Muktify works out both from the same piece of code.

Why wages can be more than your basic

Under the Code, allowances such as HRA, conveyance, the employer’s PF, bonus and overtime can make up at most half of all remuneration. Whatever is above half is added back to wages. So if your basic is 40% of your package, gratuity is now worked out on half the package instead.

Take a ₹1,00,000 monthly package that includes the employer’s PF, with a basic of ₹40,000. Half the package is ₹50,000, so ₹50,000 is your wages for gratuity. After ten years that is ₹2,88,462. Worked on basic alone, as it was before the Code, it would have been ₹2,30,769, so the rule adds ₹57,693.

If your basic is already half your pay or more, nothing changes, and gratuity is still worked out on basic plus DA.

Where the Ministry’s own FAQs disagree

There is one open question: does gratuity itself count in “all remuneration” when you apply the 50% test? The Ministry of Labour’s FAQ of 30 December 2025 (Illustration 7) counted it. Its FAQ of 16 March 2026 says only statutory items such as the employer’s PF, pension and statutory bonus count, and that “gratuity, ESI and other retirement benefits are not included”.

On the illustration’s own numbers, the answer changes. With ₹20,000 basic, ₹40,000 of allowances and ₹16,000 of gratuity and retrenchment compensation, the December reading gives wages of ₹22,000; leaving gratuity out, as the March FAQ says, gives ₹30,000. Over ten years that is ₹1,26,923 against ₹1,73,077.

Muktify follows the March 2026 FAQ, which is the later and more specific answer, for both gratuity and PF. FAQs are guidance rather than law, so until the rules or a court settle it, your employer may read it differently.

Five years, one year on a fixed-term contract, and the rounding trap

A permanent employee must complete five years of continuous service before any gratuity is payable; below that the entitlement is zero. A fixed-term employee qualifies after completing one year under the contract. The waiting period does not apply at all where service ends because of death or disablement.

Separately, once you have qualified, a part-year of six months or more counts as a full year. The two rules are often merged into one, and that is an expensive mistake. At four years and seven months a permanent employee’s service would round up to five years for the formula, but they still receive nothing, because they never qualified.

For a fixed-term employee on ₹50,000 of wages, one year pays ₹28,846, and two years and seven months counts as three years and pays ₹86,538.

Worked examples

At ₹50,000 of monthly wages: five years gives ₹1,44,231, ten years ₹2,88,462, and twenty years ₹5,76,923. At ₹80,000 after fifteen years it is ₹6,92,308. At ₹1,00,000 after twenty-five years, ₹14,42,308.

It grows in a straight line with both inputs, because nothing in the formula compounds: double the years or double the wages and the payment doubles. People often picture gratuity growing faster the longer they stay, but it does not.

The ceiling and tax

Gratuity is capped at ₹20,00,000, the ceiling currently notified. On ₹1,50,000 of wages after thirty years the formula gives ₹25,96,154, but the statutory payment is ₹20,00,000. An employer can pay more under a better award, agreement or contract.

For non-government employees, gratuity is tax-free up to the same ₹20,00,000, counted across your whole career rather than per employer. Anything above that is taxed as salary. Tax depends on your own situation, so check your figure with a professional.

What this does not cover

This is the calculation under the Code for an employee it covers, which means an establishment with ten or more employees. A smaller employer’s gratuity, if any, is a matter of your contract. Death and disablement cases, piece-rate and seasonal workers are not modelled.

Continuous service has a statutory meaning that can include certain absences, and disputes about it turn on facts a calculator cannot see. If your joining date, notice period or a break in service decides your figure, that is a question for your employer's HR or a professional rather than an estimate.