The formula in plain words
Gratuity rewards long service. For each year you worked, the employer pays 15 days of your last drawn wages. Because a month is taken as 26 working days, the formula becomes gratuity = monthly wages × 15 × years ÷ 26. Wages here means basic pay plus dearness allowance, not your full CTC.
Employers that are not covered by the gratuity law often still pay it voluntarily. The customary formula for them uses 30 days in a month and counts only completed years: monthly wages × 15 × completed years ÷ 30.
Eligibility after the labour codes
The Code on Social Security, in force from 21 November 2025, keeps the five-year rule for permanent staff but allows fixed-term employees to claim gratuity after one year of continuous service. It also brings in a uniform definition of wages: if allowances and other exclusions exceed 50% of total remuneration, the excess is added back to wages. The calculator has an optional box for your total monthly pay so it can apply this rule.
Examples
| Wages (basic + DA) | Service | Counted as | Gratuity |
|---|---|---|---|
| ₹50,000 | 7 years | 7 years | ₹2,01,923 |
| ₹40,000 | 5 years 7 months | 6 years | ₹1,38,462 |
| ₹30,000 (fixed-term) | 1 year 2 months | 1 year | ₹17,308 |
Tax on gratuity
A private-sector employee can receive up to ₹20 lakh of gratuity tax-free over their working life, limited to the amount worked out by the formula. Anything above that is added to salary income for the year.
Read the complete gratuity calculation guide for rounding rules and employer obligations. At exit you will usually also be paid for unused leave: estimate it with the leave encashment calculator, and remember to issue an experience letter.
Frequently asked questions
What is the formula for gratuity?
For employers covered by the gratuity law: last drawn basic plus DA × 15 × years of service ÷ 26. For employers not covered, the divisor is 30 and completed years only are counted.
Is gratuity paid before 5 years?
Permanent employees generally need 5 years of continuous service, except on death or disablement. Under the Code on Social Security, fixed-term employees become eligible after 1 year.
How is 5 years 7 months counted?
For covered employers a part year of more than six months counts as a full year, so 5 years 7 months is paid as 6 years. Several courts have also held that 4 years and 240 working days can satisfy the five-year condition.
How much gratuity is tax-free?
For private-sector employees the exemption is the least of the actual gratuity, the formula amount and ₹20 lakh. Government employees receive gratuity fully tax-free.
Does the 50% wage rule change gratuity?
Yes, it can. If allowances are more than half of total pay, the excess is treated as wages, which raises the salary used in the formula.
