Gratuity rules in India (2026): eligibility, formula and limit
Gratuity is a lump sum an employer pays when an employee leaves after at least five years of continuous service, or after one year for fixed-term employees under the Code on Social Security, in force since 21 November 2025. It is 15 days’ wages for each completed year: last drawn wages × 15 × years of service ÷ 26, up to ₹20 lakh.
Who gets gratuity
- Employers covered: establishments with 10 or more employees.
- Permanent employees: after five years of continuous service, on resigning, retiring or being let go.
- Fixed-term employees: after one year of service on the contract, in proportion to the time served.
- Death or disablement: gratuity is paid without the minimum service period.
The formula
Gratuity = last drawn wages × 15 × completed years of service ÷ 26
“Wages” means basic pay plus dearness allowance (and retaining allowance). If allowances such as HRA and conveyance are more than half of total pay, the part above half is added back to wages. A final year with more than six months of service is usually counted as a full year.
Example
| Step | Working | Amount |
|---|---|---|
| Last drawn wages (basic + DA) | ₹30,000 a month | |
| Years of service | 7 years | 7 |
| Gratuity | ₹30,000 × 15 × 7 ÷ 26 | ₹1,21,154 |
Try it with your own numbers in the gratuity calculator.
Limit and tax
Gratuity is capped at ₹20 lakh. For private-sector employees, gratuity up to ₹20 lakh is also free of income tax. Employers should pay it within 30 days of it becoming due.
How Crew helps
Crew keeps each employee’s joining date, salary history and exit in one place, so years of service and last drawn wages are ready when you settle a final payment. See payroll.
Frequently asked questions
What is the gratuity formula in India?
Last drawn wages (basic pay plus DA) × 15 × completed years of service ÷ 26.
After how many years is gratuity paid?
After five years of continuous service for permanent employees. Under the Code on Social Security, fixed-term employees get gratuity after one year, in proportion to the time served.
What is the maximum gratuity amount?
₹20 lakh. For private-sector employees, gratuity up to ₹20 lakh is also exempt from income tax.
Is gratuity paid on basic salary or CTC?
On wages: basic pay plus dearness allowance. If other allowances are more than half of total pay, the excess is added back to wages.
