Here is how gratuity is calculated: 15 days’ wages for every completed year of service, using the formula last drawn wages × 15 × years of service ÷ 26. Since 21 November 2025, gratuity is governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. The 5-year rule still applies to most employees, but fixed-term employees now qualify after one year.
This guide explains the formula with examples, who is eligible, what counts as wages under the new labour codes, the ₹20 lakh ceiling, and how to recover unpaid gratuity in Delhi.
Key takeaways
- Formula: last drawn wages × 15 × completed years ÷ 26.
- A part year of more than six months counts as a full year.
- Permanent employees need 5 years of continuous service; fixed-term employees qualify after 1 year (pro rata).
- No minimum service is needed on death or disablement.
- Gratuity is capped at ₹20 lakh under the current notification.
In this guide
Which law governs gratuity now?
The four labour codes came into force on 21 November 2025. Gratuity is now covered by Chapter V of the Code on Social Security, 2020, mainly Section 53. The core rules of the Payment of Gratuity Act, 1972 carry over: 15 days’ wages per year, the 5-year rule and the ceiling. The main changes are gratuity for fixed-term employees after one year and a wider definition of wages.
| Point | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 |
|---|---|---|
| Main section | S. 4 | S. 53 |
| Minimum service (regular employees) | 5 years | 5 years |
| Fixed-term employees | 5 years | 1 year, pro rata |
| Wages | Basic + DA | Basic + DA + retaining allowance, with the 50% rule |
| Ceiling | ₹20 lakh | Notified by the Central Government (₹20 lakh) |
The gratuity formula
For employees paid monthly, the formula is:
Gratuity = Last drawn wages × 15 × Completed years of service ÷ 26
The figure 26 represents working days in a month, and 15 represents half a month’s wages for each year. Seasonal establishments pay seven days’ wages per season. For piece-rated workers, wages are averaged over the last three months.
Worked examples
| Case | Wages (basic + DA) | Service | Gratuity |
|---|---|---|---|
| Regular employee | ₹40,000 | 10 years | ₹40,000 × 15 × 10 ÷ 26 = ₹2,30,769 |
| Part year over 6 months | ₹50,000 | 7 years 8 months (counted as 8) | ₹50,000 × 15 × 8 ÷ 26 = ₹2,30,769 |
| Part year under 6 months | ₹50,000 | 7 years 4 months (counted as 7) | ₹50,000 × 15 × 7 ÷ 26 = ₹2,01,923 |
| Fixed-term employee | ₹30,000 | 1 year 9 months (counted as 2) | ₹30,000 × 15 × 2 ÷ 26 = ₹34,615 |
Always check the result against the ₹20 lakh ceiling. An employer can pay more under a contract or company policy, but not less than the statutory amount.
Who is eligible for gratuity?
- Employees of establishments covered by the gratuity provisions (generally those with ten or more employees).
- Permanent employees with five years of continuous service, payable on superannuation, retirement, resignation or termination.
- Fixed-term employees after one year of continuous service, on a pro-rata basis.
- Nominees or legal heirs on the employee’s death, with no minimum service required.
- Employees who leave due to disablement from accident or disease, with no minimum service required.
Continuous service is not broken by leave, lay-off, strikes that are not illegal, or authorised absence. An employee who has worked the minimum number of days in a year (generally 240) is treated as having completed that year.
What counts as wages under the new labour codes
Wages include basic pay, dearness allowance and retaining allowance. Allowances such as HRA, conveyance, overtime and bonus are excluded. But there is a safeguard: if the excluded components exceed 50% of total remuneration, the excess is added back to wages. Many salary structures with a low basic pay will therefore see a higher gratuity under the codes.
Example: total pay ₹1,00,000 with basic + DA of ₹35,000. Excluded allowances are ₹65,000, which is ₹15,000 above the 50% limit. That ₹15,000 is added back, so wages for gratuity become ₹50,000.
When gratuity must be paid
The employer must calculate gratuity as soon as it becomes payable and pay it within 30 days. Delay attracts simple interest at the rate notified by the government, unless the delay was caused by the employee.
Gratuity can be forfeited, wholly or partly, only in limited cases: termination for wilful damage to the employer’s property, riotous or disorderly conduct, or an offence involving moral turpitude committed in the course of employment.
How to claim unpaid gratuity in Delhi
- Apply to the employer in writing, with your service details and bank account, and keep proof of delivery.
- If the employer does not pay or disputes the amount, send a legal notice.
- File an application before the competent authority under the Code with the Delhi Labour Department in your district.
- Attach appointment letter, salary slips, relieving letter and correspondence.
- The authority decides the amount and directs payment with interest; it can be recovered as arrears of land revenue.
Unpaid salary often comes with unpaid gratuity. Our guide on recovering unpaid salary in Delhi explains the parallel remedies, and a labour lawyer in Delhi can file and argue the claim.
Is gratuity taxable?
Gratuity received by government employees is fully exempt from income tax. For other employees, gratuity is exempt up to the statutory limit (currently ₹20 lakh across a lifetime); any amount above that is taxed as salary.
Frequently asked questions
What is the formula for gratuity?
For monthly-paid employees, gratuity equals last drawn wages multiplied by 15 and by completed years of service, divided by 26. Wages mean basic pay plus dearness allowance and retaining allowance. Any part year above six months counts as a full year.
Is 5 years of service required for gratuity?
For permanent employees, yes, five years of continuous service is required. There is no minimum on death or disablement. Under the Code on Social Security, 2020, fixed-term employees qualify after just one year, on a pro-rata basis.
Is 4 years and 7 months counted as 5 years for gratuity?
The six-month rounding rule applies to calculation once you are eligible. Whether 4 years and 7 months meets the 5-year eligibility depends on continuous service rules; courts have accepted 240 days of work in the fifth year in some cases. Check your exact service record.
What is the maximum gratuity amount?
The current ceiling is ₹20 lakh. The Code on Social Security lets the Central Government notify the ceiling. Employers can pay more under a contract or policy, but the tax exemption for non-government employees is limited to the statutory amount.
What can I do if my employer does not pay gratuity?
Write to the employer, then send a legal notice. If unpaid, apply to the competent authority with the Delhi Labour Department. The authority can order payment with interest and recover it as arrears of land revenue.
Do fixed-term employees get gratuity after one year?
Yes. Since 21 November 2025, fixed-term employees are entitled to gratuity on a pro-rata basis after one year of continuous service under the Code on Social Security, 2020. The 15/26 formula applies to their completed service.
Conclusion
Now you know how gratuity is calculated: 15 days’ wages for each year of service, divided by 26. Check your wage structure against the 50% rule and claim within time if your employer delays.
Related guides and services
- Labour Lawyer in Delhi
- Money Recovery Lawyer in Delhi
- Civil Lawyer in Delhi
- Recover unpaid salary in Delhi
- How to send a legal notice in Delhi
- Gratuity calculator
Written and reviewed by Advocate Shubham Mehta
Advocate, Bar Council of Delhi (Enrl. No. D/6398/2021), and head of SRLM Law Associates. He practises before Rohini Courts, other Delhi District Courts, Family Courts, consumer commissions and the Delhi High Court. More about the firm
Speak to SRLM Law Associates
For advice specific to your situation, you may consult a qualified advocate. Advocate Shubham Mehta and the SRLM Law Associates team can be reached at +91 92052 74745 or [email protected]. Chamber: 1310, Lawyer’s Chamber Block, Rohini Courts, Delhi – 110085. Office: 250, Kayan Vihar, Delhi – 110033. Open daily, 9 am – 9 pm. See our Google reviews and directions.
This article is for general information only and is not legal advice.
