Gratuity calculation 2026: rules, formula & tax (15/26)
How gratuity is calculated in India: the 15/26 formula explained, eligibility rules, the ₹20L tax exemption cap, new labour code changes for fixed-term workers, and a worked example you can verify yourself.
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Gratuity calculation 2026: rules, formula and tax (15/26)
Most people hear about gratuity when they're about to resign — and then scramble to figure out what they're owed. The calculation itself is not complicated, but the formula has two numbers (15 and 26) that nobody explains, there are two different formulas depending on your employer's size, and the tax rules split across three employee categories. This covers all of it.
To run the numbers for your own situation, use the gratuity calculator.
What gratuity is
Gratuity is a lump-sum payment an employer makes to an employee at separation — on retirement, resignation, death, or disablement. It's governed by the Payment of Gratuity Act, 1972, which applies to factories, mines, plantations, ports, railways, and any shop or establishment that employs ten or more people.
The payment is proportional to tenure. Work five years at a company and leave; the company owes you roughly half a month's salary for every year you were there. Work twenty years and the number gets significant quickly.
Eligibility: the five-year rule (and when it doesn't apply)
Under the current Act, you need to complete at least five years of continuous service with the same employer before you're entitled to gratuity on resignation or retirement.
Two exceptions where the five-year minimum does not apply:
- Death: gratuity is paid to the nominee or legal heir regardless of how long the employee had worked
- Disablement: if an accident or disease leaves the employee disabled, gratuity is payable immediately
"Continuous service" includes authorised leave, maternity leave, and lay-off periods. A legitimate medical absence doesn't reset the clock.
One rounding rule matters for the final year: if your remaining service is more than six months, it rounds up to a full year. So 7 years and 8 months counts as 8 years; 7 years and 4 months counts as 7.
The 15/26 formula — what the numbers actually mean
For employees covered under the Act, the formula is:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
The two numbers:
15 is the days of wages awarded per year of service. Roughly half a month's salary, every year you stayed.
26 is the working days assumed in a month. The Act excludes Sundays (4 weeks, 4 Sundays off: 30 − 4 = 26). So your daily wage is monthly salary ÷ 26, and you receive 15 of those daily wages for each year you worked.
Put together: the formula divides your monthly salary by 26 to get a daily rate, then pays you 15 days at that rate per year of service.
For "last drawn salary", use basic salary plus Dearness Allowance (DA). HRA, conveyance, bonuses, and other allowances are excluded. Most private sector employees receive zero DA, so it's the basic salary figure from your payslip.
Worked example
Ananya works as a senior analyst at a mid-size Pune firm. She joined in June 2018 and resigned in September 2026 — that's 8 years and 3 months. Since 3 months is less than 6, it counts as 8 full years.
Her last drawn basic salary: ₹75,000/month. DA: ₹0.
Gratuity = (75,000 × 15 × 8) ÷ 26
= 90,00,000 ÷ 26
= ₹3,46,154
Her employer must pay ₹3,46,154. This falls well below the ₹20 lakh tax-free ceiling, so the entire amount is tax-free for Ananya.
Quick reference table: gratuity at different tenures
This uses ₹60,000/month basic salary as the base:
| Years of service | Gratuity (₹60K basic) |
|---|---|
| 5 years | ₹1,73,077 |
| 7 years | ₹2,42,308 |
| 10 years | ₹3,46,154 |
| 15 years | ₹5,19,231 |
| 20 years | ₹6,92,308 |
| 25 years | ₹8,65,385 |
| 30 years | ₹10,38,462 |
To run this for your own salary and tenure, use the gratuity calculator.
Formula for employees not covered by the Act
If your employer has fewer than ten employees, or if for any reason the establishment isn't covered under the Act, a different formula applies:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 30
The only difference is the denominator: 30 instead of 26. Because a month is treated as 30 calendar days (not 26 working days), the daily rate is lower — and so the gratuity payout is smaller.
Using the same Ananya example: (75,000 × 15 × 8) ÷ 30 = ₹3,00,000 versus ₹3,46,154 under the Act. A gap of ₹46,154 — not nothing.
Also note: for non-covered employers, fractional final years are not rounded up. Only complete years count.
Tax rules: government vs private employees
Government employees
Gratuity received by central and state government employees is entirely exempt from income tax — there is no upper cap. The maximum gratuity ceiling under CCS (Pension) Rules was raised to ₹25 lakh effective January 1, 2024, following the DA crossing 50%, but the tax exemption on the full amount received was never capped.
Private sector employees (covered under the Act)
The tax-free ceiling is ₹20 lakh. The exempt amount is the lowest of:
- Actual gratuity received
- ₹20,00,000
- The statutory formula: 15/26 × last salary × years
Anything above ₹20 lakh is added to your income and taxed at your applicable slab rate.
The ₹20 lakh is a lifetime cumulative limit. If you received ₹8 lakh tax-free from your first employer, only ₹12 lakh of headroom remains for all future employers. If you don't disclose previous gratuity receipts when filing, the excess gets added back as income.
Private sector employees (not covered under the Act)
The tax exemption uses a different formula: the exempt amount is the lowest of actual gratuity received, ₹20 lakh, or half a month's average salary (over the last 10 months) × years of service. The ₹20 lakh lifetime cap still applies.
New tax regime
Under the new tax regime (Section 115BAC), gratuity exemptions under Section 10(10) still apply — the new regime did not remove this. The ₹20 lakh cap for private sector employees is unchanged regardless of which regime you're on.
New rules under the labour codes
The Code on Social Security, 2020 came into effect on November 21, 2025, consolidating the Payment of Gratuity Act along with several other labour laws into a single framework.
Two changes affect gratuity directly.
First, fixed-term employees now qualify for gratuity after one year instead of five. Under Section 53 of the Code, anyone on a written fixed-term contract is eligible for pro-rata gratuity after one year of continuous service. Previously, fixed-term workers were routinely denied gratuity because contracts were structured to stay just under five years.
Second, the wage definition is broader. The Code requires wages used for gratuity calculations to be at least 50% of CTC. Companies that had set basic salary at 25–30% of CTC to keep gratuity (and PF) obligations low will see the calculation base go up. If your employer has a low basic-to-CTC ratio, your gratuity payout from here on will be higher than under the old rules.
The central and state-specific implementation rules are still being published — as of June 2026, not all states have issued their final rules. If you're at a company that hasn't updated its gratuity policy since November 2025, ask HR whether they've recalculated on the new wage definition.
When gratuity must be paid
Under the Act, the employer must pay gratuity within 30 days of it becoming due. If payment is delayed beyond 30 days, interest accrues at 10% per year on the outstanding amount.
To claim, you submit Form I (application for gratuity) to your employer. In death or disablement cases, the nominee submits Form J. The employer then pays or raises a dispute within 15 days.
If the employer denies or underpays, you can file a complaint with the Controlling Authority (typically the regional labour commissioner). A nominee who isn't being paid after an employee's death can also approach the Controlling Authority directly.
Where gratuity fits in your overall retirement picture
Gratuity is not a substitute for active retirement saving. The Act caps the payout at ₹20 lakh regardless of tenure or salary growth, so over a 30-year career it's one input, not the main one.
PF (compounding at 8.25% tax-free) and NPS typically build much larger corpuses. Gratuity's advantage is that it's guaranteed and arrives as a lump sum exactly when you're between jobs — useful for liquidity, not for long-term wealth. For where the money goes after you receive it, the salary investment plan guide covers the framework, and the income tax planning guide covers how to handle the tax on a transition year with unusually high income.
Tax rules cited are based on the Income Tax Act provisions as of FY2025-26. Labour code implementation status as of June 2026. Verify current rules with the official Income Tax India website or a qualified CA before filing.
Sources: Payment of Gratuity Act, 1972 — CLC.gov.in | Code on Social Security, 2020 — PIB | DoPPW OM on ₹25L cap — doppw.gov.in | Labour Codes in force — PIB Nov 2025 | ClearTax — Income Tax Exemption on Gratuity | BankBazaar — Gratuity Calculation 2026
Frequently asked questions
What is the 15/26 formula in gratuity?
The formula is: Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26. The 15 is 15 days of wages per year of service. The 26 is the assumed number of working days in a month (a calendar month minus Sundays). To get your daily wage, the formula divides monthly salary by 26 — then pays you 15 of those daily wages for every year you worked.
What is the gratuity percentage of salary?
For each year of service, you receive 15 days' pay. Since the month is treated as 26 working days, that's 15/26 of a month's salary per year — roughly 57.7% of one month's salary per year of service. Over 10 years, that's roughly 5.77 months' salary total. Over 20 years, roughly 11.5 months'.
What are the new gratuity rules in 2025?
The Code on Social Security, 2020 came into force on November 21, 2025. The two main gratuity changes: (1) fixed-term employees now qualify for gratuity after one year instead of five, on a pro-rata basis; (2) wages used for gratuity calculation must be at least 50% of CTC, which raises the calculation base for employees at companies with low basic-to-CTC ratios. The ₹20 lakh tax exemption cap for private sector employees is unchanged.
Is gratuity taxable in India?
For government employees, gratuity is fully tax-free. For private sector employees covered under the Act, it's tax-free up to ₹20 lakh (lifetime cumulative limit). Anything above ₹20 lakh is taxable at your applicable income tax slab. The ₹20 lakh cap applies regardless of whether you're on the old or new tax regime.
Can you receive gratuity before 5 years?
Under the current Act, no — unless you die or become disabled. In those cases, the five-year rule is waived and gratuity is paid to the nominee or heir. From November 2025, fixed-term contract employees are an exception: they can receive pro-rata gratuity after one year. Regular permanent employees still need five years.
How is gratuity calculated if the employer is not covered under the Act?
The formula changes to: Gratuity = (Last drawn salary × 15 × Years) ÷ 30. The denominator becomes 30 (calendar days) instead of 26 (working days), so the payout is lower. Only complete years of service count — there's no rounding up for a partial final year. The ₹20 lakh tax exemption ceiling still applies, but the exempt amount is calculated using a different method: the lowest of actual amount, ₹20 lakh, or half a month's average salary × years worked.