In short: Gratuity calculation India follows the formula: (Last drawn wages × 15 × completed years of service) ÷ 26. Since 21 November 2025, the Code on Social Security, 2020 has replaced older law, broadening what counts as “wages” and reducing the eligibility threshold for fixed-term employees to just one year.
Key points
- The standard formula — (Last drawn wages × 15 × years) ÷ 26 — remains unchanged under the new law; only eligibility conditions and the wage definition have shifted.
- Most employees need five years of continuous service to qualify; this requirement is waived entirely if separation is due to death or disablement.
- Under the Code on Social Security, 2020, fixed-term employees qualify after just one year of continuous service, down from five.
- The new law requires that “wages” (the salary base used for the calculation) must be at least 50% of total CTC — meaning employers can no longer deflate the base through allowances.
- If your last year of service is more than six months, it rounds up to a full year; if it is six months or less, it is ignored.
- The four Labour Codes, including the Code on Social Security, 2020, came into effect on 21 November 2025, rationalising 29 earlier labour laws.
What is gratuity and who does it apply to?
Gratuity is a statutory terminal benefit — a lump-sum payment an employer must make to an employee on separation from employment. It is not a gift; it is a legal obligation.
For most of its history, gratuity in India was governed by the Payment of Gratuity Act, 1972. Since 21 November 2025, it falls under the Code on Social Security, 2020, which consolidates and replaces the earlier provisions along with 28 other labour laws.
The law applies when an employee leaves through resignation, retirement, superannuation, death, or disablement. The calculation formula itself has not changed, but two important things have: who qualifies, and what salary figure you plug into the formula.
How is gratuity calculated in India? The core formula
For all employees covered under the Act, the formula is:
Gratuity = (Last drawn wages × 15 × Number of completed years of service) ÷ 26
“Last drawn wages” means your basic pay plus dearness allowance (DA) plus any retaining allowance. The number 15 represents 15 days’ wages — roughly half a month. The number 26 represents the average working days in a month, excluding Sundays and weekly rest days.
A worked example
Say your last drawn wages are ₹50,000 per month and you have worked for 12 years and 8 months.
Because 8 months exceeds six months, your service rounds up to 13 years.
Gratuity = (50,000 × 15 × 13) ÷ 26 = ₹3,75,000
What if your employer is not covered under the Act?
Employers who fall outside the Act’s coverage may still pay gratuity voluntarily or under a company policy. In such cases, a slightly different formula is used:
Gratuity = (15 × Last drawn salary × Years of service) ÷ 30
Here the divisor changes from 26 to 30, and only fully completed years of service are counted — partial years are not rounded up.
| Factor | Covered under the Act | Not covered under the Act |
|---|---|---|
| Formula divisor | 26 (working days in a month) | 30 (calendar days in a month) |
| Rounding of final year | More than 6 months rounds up to 1 year | Only fully completed years counted |
| Eligibility (regular employee) | 5 years continuous service | Depends on employer policy |
Eligibility: who can claim gratuity?
Regular and permanent employees
You must have completed at least five years of continuous service with the same employer. This threshold applies to resignation, retirement, and superannuation.
The five-year rule is waived entirely if you die or become disabled due to accident or disease. In those cases, gratuity is payable regardless of how long you served.
Fixed-term employees — a major change
This is where the Code on Social Security, 2020 makes a significant practical difference. Fixed-term employees (FTEs) — those on time-bound contracts — now qualify for gratuity after just one year of continuous service, instead of five.
The calculation formula and the six-month rounding rule remain exactly the same for FTEs. The only change is the dramatically lower entry point.
| Type of employee | Under the Payment of Gratuity Act, 1972 | Under the Code on Social Security, 2020 |
|---|---|---|
| Regular / permanent employee | 5 years continuous service | 5 years continuous service (unchanged) |
| Fixed-term employee | 5 years continuous service | 1 year continuous service |
| Death or disablement (any employee) | No minimum service required | No minimum service required (unchanged) |
What counts as “wages” for the gratuity calculation?
Under the old Payment of Gratuity Act, 1972, many employers structured salaries to keep the “basic pay” figure low, reducing the gratuity base and therefore the payout.
The Code on Social Security, 2020 closes this gap. Under the new law, “wages” — the figure you use in the formula — must constitute at least 50% of your total CTC. It can be higher than 50%, but it cannot be lower.
In practice, this means: if your total allowances push wages below the 50% threshold, the excess allowances must be reclassified and added back into “wages” for the purpose of calculating gratuity (and also provident fund and other statutory benefits).
This change effectively increases the gratuity base — and therefore the final payout — for many employees whose CTC was heavily structured around allowances.
The rounding rule for years of service
When working out how many years to use in the formula, apply this simple rule:
If your final year of service is more than six months, round it up to a full year. If it is six months or less, it is treated as a zero for that final year.
Example: 10 years and 7 months = 11 years for the formula. 10 years and 5 months = 10 years for the formula.
For more guides on employment rights, statutory benefits, and workplace law, visit our Law for You hub — written in plain English for employees and employers alike.
Frequently asked questions
Is the gratuity formula different after the new Labour Codes came into force in 2025?
No. The calculation formula — (last drawn wages × 15 × completed years) ÷ 26 — has not changed. What changed on 21 November 2025, when the Code on Social Security, 2020 took effect, is the wage definition (wages must now be at least 50% of total CTC) and the eligibility threshold for fixed-term employees (reduced from 5 years to 1 year).
Can I claim gratuity if I resign before completing five years?
Generally, no — regular employees must complete five years of continuous service to be eligible. However, if you are a fixed-term employee, you now qualify after just one year under the Code on Social Security, 2020. The five-year rule is also waived entirely for any employee who dies or becomes disabled due to accident or disease.
What salary figure should I use in the gratuity formula — my basic pay or my full CTC?
You use “last drawn wages,” which under the new law means basic pay plus dearness allowance plus any retaining allowance — but this figure cannot be less than 50% of your total CTC. If your employer’s salary structure pushes wages below that threshold, the excess allowances must be added back to arrive at the correct base for the calculation.
This article is for general information only and is not legal advice. Laws change; verify against the primary sources cited and consult a qualified advocate for your situation.
