Gratuity Rules 2026: Formula, Eligibility and What the Labour Codes Changed

Gratuity is a lump sum your employer pays when you leave after several years of service. The new labour codes changed who qualifies and how much they get. Here are the current rules, with examples.

The formula

For employers covered by the gratuity law (most establishments with 10 or more employees):

Gratuity = 15 × last monthly basic pay + DA × years of service ÷ 26

That is 15 days' wages for every completed year, with a month counted as 26 working days. In the final year, more than 6 months counts as a full year.

Who qualifies

• Permanent employees: after 5 years of continuous service with the same employer.
• Fixed-term employees: after 1 year, under the Code on Social Security. Before the code, fixed-term staff also needed 5 years, so many contract roles now earn gratuity for the first time.
• Death or disablement: gratuity is payable regardless of how long you worked, and is paid to your nominee in case of death.

The employer must pay within 30 days of it becoming due. If they delay, interest is payable.

What the labour codes changed: the 50% wage rule

Under the codes, basic pay plus DA must be at least half of your total pay. If your allowances add up to more than half, the excess is counted as wages for gratuity and PF.

This raises gratuity for anyone whose salary was built on a low basic. For 10 years of service:

• Basic of ₹40,000: gratuity of ₹2,30,769.
• Basic raised to ₹60,000 to meet the 50% rule: gratuity of ₹3,46,154, about 50% more.

Your CTC usually stays the same. More of it goes into PF and gratuity and less into monthly take-home pay; see CTC vs in-hand salary.

Tax on gratuity

• Private-sector employees: gratuity is tax-free up to ₹20 lakh over your working life (across all employers). Anything above that is taxed as salary.
• Central and state government employees: gratuity is fully exempt.
• Gratuity paid while you are still in service, or to someone not covered by the law, is taxed differently. Ask your employer how it will be treated.

Gratuity in your CTC

Many offer letters include gratuity of about 4.81% of basic in the CTC. You only receive it if you stay long enough to qualify (5 years, or 1 year on a fixed-term contract). If you're likely to leave sooner, treat that part of the CTC as money you won't see.

Calculate your gratuity

Enter your last basic pay and years of service in the gratuity calculator. To see how gratuity fits into your salary package, use the in-hand salary calculator.

Employers not covered by the gratuity law may have their own gratuity scheme; check your appointment letter or HR policy.