The gratuity formula
Gratuity is a lump sum your employer pays when you leave after long service. For employers covered by the law, it is 15 days’ wages for every completed year of service, with a month counted as 26 working days:
Gratuity = last drawn monthly wages × 15 × years of service ÷ 26
For example, with basic + DA of ₹60,000 and 7 years of service: 60,000 × 15 × 7 ÷ 26 = ₹2,42,308.
- Rounding: if your last year of service is more than six months, it counts as a full year. Six years and seven months counts as seven years; six years and five months counts as six.
- Wages are basic pay plus dearness allowance. Under the labour codes, wages cannot be less than half of your total pay: if allowances are more than 50%, the excess is added back to wages. Enter your total pay to apply this rule.
- Eligibility: permanent employees need five years of continuous service. The five-year condition does not apply on death or disablement. Under the Code on Social Security, fixed-term employees qualify after one year.
- Ceiling: the maximum payable under the law is ₹20 lakh. An employer can choose to pay more.
The labour codes
The four labour codes came into force on 21 November 2025. The Code on Social Security, 2020 took over the Payment of Gratuity Act, 1972, keeping the 15-day formula and adding gratuity for fixed-term employees after one year and the 50% wage rule. The ₹20 lakh ceiling set in 2018 continues until the government notifies a new one.
Employers not covered by the law
If your employer has fewer than 10 employees and is not covered, any gratuity it pays is voluntary. For tax purposes such gratuity is worked out as half a month’s average salary (the average of the last 10 months) for each completed year, which is why the calculator then divides by 30 and ignores part-years.
Tax
For private-sector employees, gratuity is tax-free up to ₹20 lakh over your whole working life. Anything above that is taxed as salary. Central and state government employees follow different rules.
Sources
- Ministry of Labour & Employment (labour codes)
- Lakshmikumaran & Sridharan: gratuity under the Code on Social Security
- Income Tax Department: tax rates for individuals
Figures last checked against these sources on 4 November 2026. This tool gives an estimate for planning, not tax, legal or financial advice.