How to calculate gratuity in India, step by step
An employee resigns on a Friday after seven years. By Monday the settlement needs a gratuity figure that will survive an audit. The formula is short. The mistakes happen around it: the wrong salary base, a partial year rounded the wrong way, a cap nobody checked. This page walks through the calculation in five steps, then runs four worked examples the way an HR manager would.
Last updated 12 September 2026. Reflects the Code on Social Security 2020, in force since 21 November 2025.
What are the five steps to a gratuity figure?
The statutory rate is 15 days of wages for every completed year of service. The 26 in the divisor is the number of working days the law assumes in a month, so wages ÷ 26 gives a daily rate, and × 15 gives fifteen days of it. That is the whole formula. The steps around it are where the care goes.
-
STEP 1
Confirm the person is eligible
A permanent employee qualifies after five years of continuous service with the same employer. Continuous service is broader than unbroken attendance. It includes weekly offs, paid leave and maternity leave, and any year in which the person worked at least 240 days counts, or 190 days in a mine or an establishment working fewer than six days a week. The Ministry of Labour's own FAQ restates the five year rule under Section 53 of the Code (Ministry of Labour and Employment, 2026).
Three cases skip the five years. Death and permanent disablement pay out at any tenure, to the nominee or legal heirs. A fixed term employee engaged directly by you becomes eligible after one year under the contract, on a proportionate basis. Contract labour supplied through a contractor is the contractor's liability, not yours.
-
STEP 2
Fix the wage base
Wages for gratuity means basic pay, dearness allowance and retaining allowance if any. HRA, conveyance, overtime, bonus and other allowances are excluded. Pulling gross salary from the payroll export is the single most common error, and it inflates the figure every time.
Since 21 November 2025 there is a second check. If the excluded allowances add up to more than 50 percent of total remuneration, the amount above 50 percent is added back to wages (PIB, 2025). A salary structure that kept basic thin to hold gratuity down no longer works. How your CTC is split now decides the gratuity base directly.
-
STEP 3
Count the years, then round once
Count completed years from the date of joining to the last working day. Only the final incomplete year is rounded. More than six months rounds up to a full year. Six months or less is dropped. Seven years and seven months is eight years. Seven years and four months is seven.
Use exact dates, not the tenure someone remembers. A settlement built on an approximate joining date is brittle, and the difference of one month can move the figure by a full year's gratuity.
-
STEP 4
Apply the formula
Wages × 15 × years ÷ 26. Keep the paise through the calculation and round only the final amount. Show the daily rate and the per year figure next to the total so whoever signs off can check it quickly.
-
STEP 5
Check the cap and label anything above it
The statutory ceiling is ₹20 lakh. If the formula produces more, the liability stops at ₹20 lakh. You may pay more voluntarily, but the excess is ex gratia, it is taxable, and it should sit on its own line in the settlement so the employee's tax filing is not a guess.
Four worked gratuity calculation examples
Each example uses the same formula and shows every intermediate figure. Amounts are rounded to the nearest rupee only at the end.
Example 1: a plain case, 8 years and 9 months
Basic plus DA of ₹35,000 a month. Nine months is more than six, so tenure rounds up to nine years.
| Line | Working | Amount |
|---|---|---|
| Daily wage | 35,000 ÷ 26 | ₹1,346.15 |
| One year's gratuity | 1,346.15 × 15 | ₹20,192.31 |
| Nine years | 20,192.31 × 9 | ₹1,81,730.77 |
| Payable | Below the ₹20 lakh cap | ₹1,81,731 |
Example 2: the rounding rule, two employees on the same pay
Both earn ₹50,000 basic plus DA. Employee A leaves at 7 years and 4 months, which stays at seven years. Employee B leaves at 7 years and 8 months, which becomes eight.
| Employee | Working | Amount |
|---|---|---|
| A, 7 years | 50,000 × 15 × 7 ÷ 26 | ₹2,01,923 |
| B, 8 years | 50,000 × 15 × 8 ÷ 26 | ₹2,30,769 |
| Difference | Four extra months of service | ₹28,846 |
This is why the joining date and last working day have to be right in the system from day one. Nothing else in the calculation moves the number this much for this little.
Example 3: the 50 percent wage rule changes the base
Monthly remuneration of ₹1,00,000, of which basic plus DA is ₹40,000 and allowances are ₹60,000. Six completed years. Under the old reading the base would have been ₹40,000. Under the Code, allowances above half of remuneration are added back.
| Line | Working | Amount |
|---|---|---|
| Half of remuneration | 1,00,000 × 50% | ₹50,000 |
| Excess allowances | 60,000 − 50,000 | ₹10,000 |
| Wages for gratuity | 40,000 + 10,000 | ₹50,000 |
| Gratuity, 6 years | 50,000 × 15 × 6 ÷ 26 | ₹1,73,077 |
| On the old base | 40,000 × 15 × 6 ÷ 26 | ₹1,38,462 |
The 50 percent test is applied to total remuneration as defined in the Code on Wages. Check your own salary heads against the definition before relying on this example.
Example 4: when the formula crosses ₹20 lakh
A senior employee on ₹80,000 basic plus DA with 28 years of service comes to ₹12,92,308, well under the cap. Move to ₹1,20,000 basic plus DA and 30 years and the formula gives ₹20,76,923. The statutory payment is ₹20 lakh. The remaining ₹76,923 is paid only if you choose to, and it goes on the settlement as taxable ex gratia.
Which edge cases change the answer?
Resignation versus termination. It makes no difference to eligibility. Resignation, retirement, superannuation and termination all pay out once the service condition is met. The one carve out is forfeiture: after termination for the specific kinds of misconduct the Code lists, an employer may forfeit gratuity in whole or in part. Withholding gratuity because someone resigned, or because they served a short notice, is not defensible. The notice period and the gratuity are separate ledgers.
Fixed term staff. One year under a direct contract is enough, and the same 15/26 formula applies to the years actually served. A two year fixed term employee on ₹30,000 basic plus DA is owed 30,000 × 15 × 2 ÷ 26, which is ₹34,615, on the day the contract ends.
Death or disablement before five years. Gratuity is payable at once to the nominee or heirs, on the years actually completed, with no threshold. Three years and four months on ₹28,000 gives 28,000 × 15 × 3 ÷ 26, or ₹48,462. These settlements should not wait on paperwork, so nominee details belong in the employee record from the first week, not the last.
Service straddling 21 November 2025. The Ministry's FAQ is terse on this: an exit on or after that date is settled on last drawn wages under the Code, for the whole tenure, not split into two regimes (Ministry of Labour and Employment, 2026). Long absences are the other trap. Whether a sabbatical or extended unpaid leave counts as service is a policy term, and the leave guides cover what to write down first.
How much of the gratuity is tax free?
For a private sector employee, the gratuity worked out under the statutory formula is exempt under Section 10(10) of the Income Tax Act, up to a notified ceiling. That ceiling has been ₹20 lakh since the gratuity limit was raised with effect from 29 March 2018 (PIB, 2019). Government employees are exempt in full under the same section.
An employee whose employer sits outside the statutory scheme gets the least of three figures: the gratuity actually received, the notified ceiling, or half a month's salary for each completed year, on the average salary of the ten months before leaving (Income Tax Department, Section 10(10)). That third leg is often the lowest.
Two details matter at settlement time. The ₹20 lakh is a career total across all employers, so gratuity received from an earlier job eats into it. And anything paid above the statutory figure is salary income at slab rates, which is why the ex gratia line in Step 5 needs its own label. A settlement that lumps the two together hands the employee a problem in July.
How does Offrd run this calculation?
The steps above are not hard. They are easy to get slightly wrong at 6 pm on a Friday with three exits in the queue. Offrd removes the retyping. The settlement pulls the joining date, the last working day and the salary heads from the same records the payslips came from, so the wage base is the one the employee was actually paid on.
The formula, the six month rounding and the ₹20 lakh check run inside the full and final settlement module, alongside leave encashment, salary dues and the deduction heads, and the separation letter is generated from the same data. Every intermediate figure stays visible for the accountant to check before approval. To test a number before an exit is confirmed, the free gratuity calculator applies the same rules without an account, and the gratuity guide covers the background for anyone new to the concept.
One honest limit. Offrd computes and documents the gratuity. It does not decide a forfeiture dispute or whether a long absence counted as service. Those calls stay with you.
Common questions about calculating gratuity
Is gratuity calculated on basic salary or gross salary?
On wages as defined in the labour codes: basic pay plus dearness allowance and retaining allowance if any, not gross salary. If the excluded allowances add up to more than half of total remuneration, the excess is treated as wages. HRA, overtime and bonus are otherwise excluded.
How is the partial year rounded when calculating gratuity?
Only the final incomplete year is rounded. More than six months counts as a full year. Six months or less is dropped. Seven years and seven months becomes eight years, seven years and four months stays seven.
Does a fixed term employee get gratuity after one year?
Yes. Under Section 53 of the Code on Social Security 2020, a fixed term employee who completes one year of service under the contract is eligible for gratuity on a proportionate basis. The Ministry of Labour confirmed this in its labour code FAQs of March 2026.
What is the maximum gratuity an employer has to pay?
₹20 lakh. If the formula produces more, the statutory liability stops at ₹20 lakh. An employer can pay more voluntarily, but the excess is taxable in the employee's hands and should be labelled ex gratia in the settlement.
Is gratuity payable if the employee resigns?
Yes. Resignation, retirement, superannuation and termination all trigger gratuity once the service condition is met. The only exception is forfeiture after termination for the specific kinds of misconduct the Code lists.
How much gratuity is tax free?
For a private sector employee, the gratuity worked out under the statutory formula is exempt under Section 10(10) of the Income Tax Act, up to ₹20 lakh. The ₹20 lakh is a combined limit across all employers in a career, not a fresh limit per job.
Run the next settlement without a spreadsheet
Offrd computes gratuity from the payroll data you already hold and produces the full and final settlement and separation letter from the same screen. 50 free credits on signup, no card.