Most people discover gratuity on the way out of a job. Nothing is deducted for it, no payslip line mentions it, and then a lump sum either arrives or does not — which is why so many employees never find out they were owed one.
Gratuity is 15 days' wages for every completed year of service, payable after five years, calculated as (last drawn basic + DA × 15 × completed years) ÷ 26, and tax-free up to ₹20 lakh.
The bottom line
Who gets it: anyone completing five years of continuous service. The five-year rule is waived for death, disablement and the expiry of a fixed-term contract.
What the Codes changed: fixed-term employees now earn pro-rata gratuity without the five-year wait, and the 50% wage rule raised the basic + DA base the calculation runs on.
When it must be paid: within 30 days of becoming payable. Late payment carries simple interest.
What gratuity is
Gratuity is a statutory lump sum an employer pays for continuous service, on exit. Eligibility usually arrives at five years of continuous service with the same employer, and it becomes payable on superannuation, retirement, resignation, death or disablement. It now sits inside the Code on Social Security, 2020.
The employer funds all of it. Nothing comes out of your salary, which is exactly why it stays invisible until the day you leave.
The five-year rule, and when it does not apply
Five years is the headline. The requirement is waived in several situations:
- death of the employee, with the amount paid to the nominee;
- disablement from accident or disease;
- expiry of a fixed-term contract; and
- other events the Central Government may notify.
So a family does not lose gratuity because a death fell before the fifth year, and a fixed-term worker is not penalised for the shape of their contract.
One myth deserves a direct answer: people say 4 years 11 months means zero. Some High Court readings treat 240 days in the fifth year as a completed year, but the point is contested rather than settled, so treat the five-year mark as the safe line and anything short of it as an argument you may have to run.
Fixed-term staff qualify much faster
This is one of the more substantial improvements in the Codes. A fixed-term employee whose contract runs a year or more is entitled to pro-rata gratuity, with no five-year wait.
It belongs to the wider push to put fixed-term staff on the same footing as permanent employees for wages, benefits and social security, and to take away the incentive to misclassify people as fixed-term in the first place.
How the 50% wage rule raised the payout
Gratuity is calculated on wages, meaning basic plus DA. The 50% wage rule requires basic plus DA to be at least half of total pay, which for most employees lifts the base the gratuity is built on. The revised definition applies prospectively from 21 November 2025, so service from that date accrues on the higher base.
Unlike PF, gratuity feels it straight away. There is no ₹15,000-style ceiling sitting between the new wage base and the payout.
Working out the number
Gratuity = (last drawn monthly wages × 15 × completed years of service) ÷ 26
The 26 comes from treating a working month as 26 days, which is how 15 days' wages gets expressed as a fraction of monthly pay. Last drawn wages means basic plus DA. Any part of a year beyond six months rounds up to a full year.
The ₹20 lakh cap
Gratuity is exempt from income tax up to ₹20 lakh for non-government employees, which is the overall statutory ceiling the government has notified. Anything above that is taxable in your hands.
At senior levels the number can get close to the cap, so it is worth knowing where the line sits before negotiating an exit rather than after.
When it has to be paid
Once gratuity becomes payable, the employer has 30 days. Beyond that, simple interest runs for the delayed period.
File a nomination in the prescribed form when you join. It costs nothing and it is what decides who receives the money if the worst happens. Where an employer withholds gratuity that is due, you can claim it through the controlling authority under the Code.
A worked example
An employee leaves after 8 years and 7 months, with last-drawn basic plus DA of ₹50,000.
- Completed years: the extra 7 months rounds up, giving 9 years.
- Gratuity = (₹50,000 × 15 × 9) ÷ 26 = ₹2,59,615.
- That is below ₹20 lakh, so none of it is taxable.
The higher basic is doing real work here. At the ₹35,000 basic this employee might have had before the 50% rule, the same nine years would have paid roughly ₹1,81,730.
Common mistakes
- Assuming fixed-term staff get nothing. They now earn pro-rata gratuity from one year.
- Calculating on gross pay or total CTC. The base is basic plus DA.
- Never filing a nomination. Without one, the payout can sit stuck in a family dispute.
- Treating 4 years 11 months as automatically eligible. Five completed years is the safe threshold, outside the waived events.
- Missing the 30-day clock. Late payment attracts interest, and the employer pays it.
Frequently asked questions
How is gratuity calculated in 2026? (Last drawn basic + DA × 15 × completed years) ÷ 26. Part-years over six months round up.
Do I need five years to get gratuity? Generally yes, but the rule is waived for death, disablement and the expiry of a fixed-term contract. Fixed-term employees get pro-rata gratuity from one year.
Is gratuity taxable? It is tax-free up to ₹20 lakh for non-government employees. Anything above that is taxable.
How soon must my employer pay gratuity? Within 30 days of it becoming payable, with interest running on any delay.
Did gratuity amounts go up under the new codes? In effect, yes. The 50% wage rule raises the basic + DA base the calculation sits on.
Is anything deducted from my salary for gratuity? No. The employer funds it entirely.