How is gratuity calculated?
Gratuity is a lump sum your employer pays when you leave after long service, as a thank-you for your work. For most employees it is 15 days' wages for every completed year, using a 26-day working month.
Worked example
What the new Labour Codes changed
- Fixed-term employees now qualify for gratuity after one year of service, worked out pro rata. Permanent employees still need five years of continuous service.
- Wages must be at least half your pay. From 21 November 2025, basic pay plus DA must make up at least 50% of your total salary. If allowances are higher than that, the extra is added back when working out gratuity, which can raise the amount.
Tax on gratuity
For private-sector employees, gratuity is tax-free up to a lifetime limit of ₹20 lakh. Anything above that is added to your income and taxed at your slab rate. For central and state government employees, gratuity is fully tax-free.
Frequently asked questions
Do I get gratuity if I leave before 5 years?
Usually not, if you are a permanent employee. The 5-year rule does not apply if you leave because of death or disability. Fixed-term employees qualify after one year under the new Labour Codes.
Is the ₹20 lakh limit per job or for my whole career?
It is a lifetime limit for private-sector employees. If you received tax-free gratuity from an earlier employer, that amount is reduced from the ₹20 lakh limit.
When must my employer pay gratuity?
Within 30 days of it becoming due. If your employer delays, they must pay simple interest on the amount.
Can my employer pay more than this formula?
Yes. The formula is the minimum required by law. Some employers pay more under their own policy, but the tax-free limit stays at ₹20 lakh.