How gratuity is calculated in 2026
Gratuity is a lump sum your employer pays when you leave after long service. Since 21 November 2025 it is governed by the Code on Social Security, 2020 (Chapter V), which replaced the Payment of Gratuity Act, 1972. The Central Rules under the Code were notified in May 2026. The formula did not change:
Gratuity = 15 × last drawn monthly wages × years of service ÷ 26
- 15 days’ wages per year, with a month taken as 26 working days.
- A final part-year of more than six months counts as a full year (8 years 7 months = 9 years; 8 years 6 months = 8 years).
- Wages = basic pay + dearness allowance + retaining allowance. New under the Code: if excluded allowances (HRA, conveyance, special allowance, etc.) are more than 50% of total pay, the excess is added back to wages.
- Ceiling ₹20 lakh. The Government can raise it by notification.
| Rule | Before 21 Nov 2025 | From 21 Nov 2025 |
|---|---|---|
| Law | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 |
| Permanent employees | 5 years continuous service | 5 years (unchanged) |
| Fixed-term employees | 5 years | 1 year, pro-rata |
| Death / disablement | No minimum | No minimum |
| Wages base | Basic + DA | Basic + DA, at least 50% of total pay |
| Maximum gratuity | ₹20 lakh | ₹20 lakh |
| Payment deadline | 30 days, then interest | 30 days, then interest |
Income tax on gratuity
For private-sector employees covered by the law, the tax-free amount is the least of: (1) gratuity received, (2) 15/26 × last basic + DA × years of service, and (3) ₹20,00,000 (CBDT notification S.O. 1213(E), effective 29 March 2018). This was s.10(10)(ii) of the 1961 Act and is carried into section 19 of the Income-tax Act, 2025 from tax year 2026-27. If you are not covered, the formula is ½ month’s average salary (last 10 months) × completed years, again capped at ₹20 lakh. Government employees’ gratuity is fully exempt, and their gratuity is set by their own service rules, not this formula. The exemption applies in both tax regimes.
Related guides and examples
FAQ
How much gratuity will I get for 5 years with ₹30,000 basic + DA?
15/26 × ₹30,000 × 5 = ₹86,538. It is fully tax-free because it is well below ₹20 lakh.
Is gratuity now payable after 1 year?
Only for fixed-term employees. From 21 November 2025 the Code on Social Security gives them pro-rata gratuity after one year of service. Permanent employees still need 5 years of continuous service, except on death or disablement.
Does 8 years and 7 months count as 9 years?
Yes. A part-year of more than six months is rounded up, so with ₹60,000 basic + DA you get 15/26 × ₹60,000 × 9 = ₹3,11,538. With exactly 8 years 6 months it is 8 years: ₹2,76,923.
Is there a maximum gratuity limit?
Yes. Gratuity under the law is capped at ₹20 lakh, and ₹20 lakh is also the lifetime tax-free limit for non-government employees. For example, ₹2,00,000 basic + DA for 30 years gives ₹34,61,538 on the formula, but only ₹20,00,000 is payable under the law.
Sources (checked 5 Nov 2026): Code on Social Security, 2020, ss. 2(88) and 53, in force 21 Nov 2025 (Ministry of Labour & Employment, labour.gov.in); Social Security (Central) Rules, G.S.R. 344(E) of 8 May 2026; Payment of Gratuity Act, 1972, s.4; Income-tax Act, 1961 s.10(10) and Income-tax Act, 2025 s.19 (incometaxindia.gov.in); CBDT notification S.O. 1213(E) dated 8 Mar 2019 (₹20 lakh). Cross-checked with law-firm commentary (Mondaq, Bar & Bench, Business Today).