What is gratuity in India (and how estimates work)

Gratuity is an employer-funded benefit paid on qualifying employment-separation events. The Code on Social Security, 2020 has governed applicable gratuity provisions since 21 November 2025, replacing the former Payment of Gratuity Act, 1972 as the current reference. This guide is educational, not an entitlement determination or legal or tax opinion.

What gratuity is designed to do

Gratuity rewards qualifying service and is distinct from employee and employer provident-fund contributions. Coverage depends on the establishment and employment arrangement. Better terms under an applicable contract or award may also matter.

The 15/26 formula: a common estimate

A standard illustration for a regular covered employee uses: Gratuity = (last-drawn monthly statutory wages × 15 × counted years) ÷ 26. The relevant years typically include each completed year or part exceeding six months. Special rules may apply to seasonal workers, fixed-term employees and other categories. This site's arithmetic model does not decide eligibility or automatically implement every service-year and wage-base rule.

If verified statutory wages are ₹40,000/month and the model uses six years, the arithmetic result is about ₹1,38,462 before any separate eligibility, cap and tax checks. Use the actual approved wage base rather than assuming gross pay.

What counts as last-drawn statutory wages?

The current wage definition starts with Basic, dearness allowance and retaining allowance (if any). If specified excluded allowances and payments exceed the statutory 50% remuneration threshold, the excess may be added back to wages. Therefore a blanket "Basic + DA only" rule is inaccurate. Your HR calculation should identify the last-drawn wage base and any add-back.

SalaryExit does not infer the allowance add-back from a CTC breakup; enter the final monthly statutory wage basis as verified with payroll.

The five-year rule and exceptions

Five years of continuous service is the general threshold, but death, disablement and qualifying expiration of a fixed-term contract have exceptions. The Ministry of Labour's March 2026 FAQ states that a fixed-term employee qualifies after one year of service under the contract. Avoid assuming that four years and 240 days always qualifies; legal facts and applicable interpretation matter.

Employer coverage, prior service, breaks, establishment classification and eligibility under applicable provisions need separate verification.

Tax treatment is a separate calculation

A gratuity amount and a tax-exempt gratuity amount are not interchangeable. The site shows a simplified covered-employer ₹20 lakh cap assumption and a rough split, but actual exemption depends on current tax law, employment category, prior receipts and salary history. Do not use the displayed taxable balance directly as an ITR determination.

Questions worth asking HR

• Is my employment covered by the Code on Social Security gratuity provisions?
• What last-drawn statutory wage base was used, including any 50% add-back?
• What service years and rounding method were counted, and do exceptions apply?
• When is gratuity payable and what tax treatment will payroll apply?

Official references: Labour Ministry FAQs and March 2026 clarifications.

Use the gratuity calculator to estimate the 15/26 arithmetic, and the final settlement calculator to total your own verified line items. Neither tool certifies legal entitlement.