Gratuity Rules 2026: Formula, Eligibility, Rs 20 Lakh Tax

💼💡 What is Gratuity?

Gratuity is a lump sum your employer must pay you for long service, when you leave after at least 5 years. It is not a bonus or a favour, it is a legal right under the Payment of Gratuity Act, 1972.

Think of it as deferred pay. A small part of your service value is set aside and handed over in one payment when you retire, resign or are let go.

It applies to any establishment with 10 or more employees, across private companies, PSUs and government. Once the Act covers a workplace, it stays covered even if staff later drop below 10.

The amount depends on your last salary and years served, through a fixed formula. The tax you pay on it depends on whether you are a government or private employee, which is where most confusion starts.

For most salaried Indians it is one of the few guaranteed lump sums they will receive, so it is worth knowing your exact entitlement rather than trusting the employer's figure.

The benefit traces to the idea that an employer owes something extra for loyalty and years given. The law simply makes that obligation enforceable rather than optional.

Knowing the rules also helps you spot a short payment. Employers occasionally miscount service or use the wrong divisor, and the difference can be tens of thousands of rupees.

For lakhs of private-sector workers, it is a meaningful safety net at the moment of changing or leaving a job.

📊📊 Gratuity at a Glance

🧮🧮 Gratuity Calculation Formula (15/26)

For employees in a covered establishment, the formula is: Gratuity = (Basic + DA) x 15/26 x years of service. Only basic salary and dearness allowance count, not HRA or other allowances.

The 15 means 15 days of wages are rewarded for each year worked. The 26 is the assumed working days in a month, Sundays excluded, which gives a higher per-day rate than dividing by 30.

Last drawn salary means whatever you earned at the time of leaving, not an average. So a recent raise directly lifts your gratuity.

If your employer is not covered by the Act (fewer than 10 employees), the divisor is 30 instead of 26, using the average of your last 10 months' salary. That works out roughly 13% lower.

A common error is using your full CTC or gross salary in the formula. Always use only basic plus DA, or you will badly overestimate what you are owed.

Because the formula rewards your final salary, employees near a promotion or increment sometimes time their exit just after it. A higher last-drawn basic lifts the whole payout.

📑🧮 Worked Examples

Final-year service over 6 months rounds up to a full year. 6 months or less is dropped. These use the covered (divide by 26) formula.

📋✅ Gratuity Eligibility - The 5-Year Rule

The core rule is 5 years of continuous service with the same employer. Resign at 4 years 11 months and, strictly, no gratuity is due.

There is one important relaxation. Courts have held that 4 years and 240 working days (in a 5-day week) counts as 5 years, since 240 days equals a year of service.

Two exceptions waive the 5-year rule entirely: death and disability. If an employee dies or is disabled, gratuity is paid to them or the nominee no matter how short the service.

A practical tip: if you are within a few months of 5 years, it is usually worth staying. Leaving at 4 years 8 months can cost you a payment worth a month or two of salary.

Continuous service also matters. Authorised leave, notice period and even a lawful strike usually count, but a long unpaid absence can break continuity and reset the clock.

Government and PSU staff follow the same broad eligibility, though their rules sit under separate service regulations. The 5-year principle is common across both.

If you are unsure of your exact tenure, ask HR for your date of joining in writing. The 4-year-240-day line turns on a precise day count, so the exact dates matter.

🔢🧮 How years are rounded

🧾🚀 Tax on Gratuity - The Rules That Actually Apply

This is where a lot of online guides get it wrong, so read carefully. The tax-free limit is not the same for everyone.

Government employees, central, state and local body, pay zero tax on gratuity, with no upper limit, under Section 10(10)(i). Whether it is Rs 10 lakh or Rs 28 lakh, it is fully exempt.

Private employees covered by the Act are tax-free only up to Rs 20 lakh. This limit was set in March 2018 and still stands in 2026, it was not raised to Rs 25 lakh.

The Rs 25 lakh figure people quote is the payout ceiling for central government employees, lifted from Rs 20 lakh in January 2024. It is a separate thing from the private tax-free limit.

⚖️🧾 Gratuity Tax-Free Limit by Employee Type

The Rs 20 lakh limit is cumulative across your whole career, not per employer. Gratuity from all jobs combined counts toward it.

🧮⚙️ How the Private Tax-Free Amount Is Worked Out

For a private employee, the exempt amount is the lowest of three: the actual gratuity received, Rs 20 lakh, or the 15/26 formula amount. Whatever is smallest is your tax-free portion.

Anything above that is added to your salary income for the year and taxed at your slab rate. So a long-tenure, high-basic employee can have a taxable slice.

The practical upshot: someone with a Rs 23 lakh gratuity has about Rs 3 lakh taxable, not zero. Plan for that rather than assuming the whole sum is free.

One more 2026 update: under the new tax regime, a CBDT circular allows gratuity exemption up to Rs 5 lakh. Above that, the old regime's Rs 20 lakh ceiling is more generous, so your choice of regime in your exit year matters.

🆕👴 New Gratuity Rules Under the Labour Codes (2025)

The Code on Social Security 2020 came into force on 21 November 2025, and it changes gratuity in two real ways.

First, fixed-term employees now qualify after just 1 year of service, not 5. Anyone on a defined-end contract earns pro-rata gratuity from year one.

Second, the 50% wage rule. Basic pay must be at least half of your total CTC, and since gratuity is based on basic plus DA, this pushes payouts up for many employees.

Employers are also restructuring salaries to meet the 50% basic rule, which can change your monthly take-home even before you retire. Check your latest payslip for how basic and allowances are split.

For permanent staff, the core 5-year rule and the 15/26 formula are unchanged. The headline shifts are for fixed-term workers and for how salary structures are drawn up.

These codes consolidate 29 older labour laws and are being rolled out in stages. Watch for your state's notifications, since some operational details are set at state level.

❌⚠️ Three mistakes that cost people money

📝👴 Nomination and Gratuity Across Jobs

When you join a covered employer, you should file Form F to nominate who receives your gratuity if you die. Many employees skip this, which causes long delays for the family later.

You can nominate one or more family members and change it anytime. If you have no family at joining, you can nominate later once you do.

Gratuity is per employer, but the Rs 20 lakh tax-free limit is for your whole career. If you collect gratuity from several jobs over time, the combined exempt amount cannot cross Rs 20 lakh.

So someone changing jobs every 5-6 years can receive gratuity multiple times, but should track the running total for tax. Anything beyond the lifetime Rs 20 lakh is taxable.

Keep a personal note of each gratuity you receive and the year. At your next exit, that record makes the tax calculation straightforward instead of a guess.

⏱️💰 Key Gratuity Deadlines and Limits

📦⚖️ Gratuity vs Your Other Exit Dues

Gratuity is just one of several payments due when you leave a job, and people often confuse them. Each has its own rule and timeline.

EPF is your provident fund, your own and the employer's monthly contributions, withdrawn or transferred separately through EPFO. It is not linked to the 5-year gratuity rule.

Leave encashment is payment for unused earned leave, taxed under its own limit. Notice-period pay and any bonus are separate again.

So a full-and-final settlement can include gratuity, EPF, leave encashment and dues all at once. Check each line item, because employers sometimes settle salary dues but miss gratuity.

🛡️⚖️ Employer Obligations and Your Rights

Your employer must pay gratuity within 30 days of it becoming due, counted from your last working day. This is a hard deadline, not a guideline.

Miss that window and the employer owes you simple interest, generally 10% a year, on the delayed amount. Many firms delay by months, so calculate and claim that interest.

The decision on whether you qualify is not the employer's to make alone. If they dispute it, the Controlling Authority, usually the Labour Commissioner, decides.

Gratuity can only be forfeited in narrow cases, like dismissal for proven dishonesty or violence that caused the employer loss. A normal resignation or layoff never costs you gratuity.

Keep your own records: appointment letter, last payslip showing basic and DA, and your exit date. If a dispute reaches the Controlling Authority, these decide the outcome.

If the company is shutting down or insolvent, gratuity is still a protected due. Raise your claim with the Controlling Authority promptly so it is recorded.

🪜🚀 How to Claim Gratuity

⏰👴 Do not assume your gratuity is automatic

📞📚 Official Sources and Where to Check

For the law itself, the Payment of Gratuity Act 1972 and the Code on Social Security 2020 are on labour.gov.in, the Ministry of Labour and Employment site.

Disputes and claims go to your state Labour Commissioner or the Controlling Authority for your district. Each state publishes the office address online.

For the tax treatment, Section 10(10) of the Income Tax Act governs gratuity exemption. The income tax portal at incometax.gov.in has the current rules.

To estimate your amount, use a gratuity calculator with the 15/26 formula. Always enter basic plus DA, not your full CTC, or the figure will be wrong.

If your case is contested, a quick consultation with a labour lawyer or your union can help. The Controlling Authority process is designed to be accessible without one, though.

📚📚 Official Sources & References

❓Common Questions