Gratuity: Your Complete Guide to India's Retirement Benefit (2025-26)
Gratuity is a lump-sum payment from your employer as a reward for long-term service. It's one of the few benefits that's both legally guaranteed (under the Payment of Gratuity Act, 1972) and partially tax-free. Yet most employees don't know exactly how much they're entitled to or how the tax exemption works.
The gratuity formula
There are two formulas depending on whether your employer is covered under the Payment of Gratuity Act:
| Type | Formula | Divisor | Salary Component |
|---|---|---|---|
| Covered under Act | (Salary × 15 × Years) ÷ 26 | 26 (working days) | Last drawn Basic + DA |
| Not covered | (Salary × 15 × Years) ÷ 30 | 30 (calendar days) | Avg of last 10 months Basic + DA |
The difference between /26 and /30 means covered employees get about 15% more gratuity than non-covered employees on the same salary and tenure.
Eligibility rules
- 5 years continuous service — the fundamental requirement under the Gratuity Act
- 4 years 7 months — some courts have held this qualifies since 240+ days rounds to 5 years
- Fixed-term employees — eligible after just 1 year under the Code on Social Security, 2020 (effective Nov 2025)
- Death or disablement — gratuity payable regardless of tenure
- Organisation size — the Gratuity Act applies to establishments with 10 or more employees
The 6-month rounding rule
If your service in the final year exceeds 6 months, it rounds up to a full year. This can make a significant difference:
| Actual Service | Effective Years | Gratuity (₹50K salary) |
|---|---|---|
| 10 years 5 months | 10 years | ₹2,88,462 |
| 10 years 7 months | 11 years | ₹3,17,308 |
| Difference | +1 year | +₹28,846 |
If you're planning to resign and your service is close to the 6-month mark, waiting a few weeks can add a meaningful amount to your gratuity.
Tax treatment
| Employee Type | Tax-Free Limit | Taxable Portion |
|---|---|---|
| Government (Central/State) | ₹25 lakh (full amount usually) | None |
| Private — covered under Act | Least of: actual amount, ₹20L, or formula amount | Excess taxed at slab rate |
| Private — not covered | Least of: actual amount, ₹20L, or half-month × years | Excess taxed at slab rate |
The ₹20 lakh limit is cumulative across your entire career. If you received ₹8 lakh gratuity from a previous employer and now receive ₹15 lakh, only ₹12 lakh of the current gratuity is tax-free (₹20L − ₹8L already claimed).
What to do if your employer delays payment
- Employer must pay within 30 days of the gratuity becoming due
- Delayed payments attract 10% annual interest
- File Form I (application) with the employer — this creates a paper trail
- If still not paid, file a complaint with the Controlling Authority (Labour Commissioner)
- Forfeiture is only allowed for moral turpitude or wilful property damage — not for resignation or performance issues
New Labour Code 2025 changes
- 50% wage rule: Basic + DA must be at least 50% of total CTC, meaning higher gratuity for many employees
- Fixed-term eligibility: Gratuity after 1 year (vs 5 years previously) for fixed-term contract workers
- Broader coverage: More establishments brought under the Act