It also shows how much is tax free (up to ₹20 lakh for private sector employees) and whether you have completed the service needed to be eligible.
Gratuity calculation formula
Gratuity = 15 × Last drawn salary × Years of service ÷ 26
- Salary
- Last drawn monthly basic plus DA
- 15
- 15 days' wages for each year of service
- 26
- Working days in a month
- Not covered
- Divide by 30 and count only completed years
For employers covered by the gratuity law (10 or more employees), a final part-year of 6 months or more counts as a full year. For employers not covered, gratuity is optional and usually uses 30 days and completed years only.
Permanent employees need 5 years of continuous service. Under the Code on Social Security, fixed-term employees become eligible after 1 year. The 5-year condition does not apply on death or disablement.
Gratuity rules for employers
For startups and SMEs, gratuity is a real liability that grows every year. Plan for it early.
- The law applies once you have 10 or more employees on any day in the previous 12 months.
- Gratuity must be paid within 30 days of it becoming payable.
- Many companies fund the liability through a group gratuity scheme with an insurer.
- Gratuity provision should be recorded in your books every year, not only on payout.