What Changed
| Rule | Before | Under the Code on Social Security, 2020 |
|---|---|---|
| Permanent employees | 5 years of continuous service | 5 years (unchanged) |
| Fixed-term employees | 5 years | 1 year |
| Wages for gratuity | Basic + DA | Basic + DA, plus any allowances above 50% of total pay |
| Death or disability | Payable without minimum service | Unchanged |
The Formula
For establishments covered by the law: Gratuity = last drawn wages × 15 ÷ 26 × years of service. Service of six months or more in the final year counts as a full year. For employers not covered by the law, the usual practice is wages × 15 ÷ 30 × completed years.
Example 1: Permanent Employee
Last basic + DA ₹60,000 a month, service 7 years 8 months (counted as 8 years): ₹60,000 × 15 ÷ 26 × 8 = ₹2,76,923.
Example 2: Fixed-Term Employee
Monthly wages ₹50,000, contract of 2 years 3 months: ₹50,000 × 15 ÷ 26 × 2 = ₹57,692. Under the old rules this employee would have received nothing.
Example 3: The 50% Wages Rule
Total monthly pay ₹1,00,000, of which basic + DA is ₹30,000 and allowances ₹70,000. Allowances exceed 50% of pay by ₹20,000, so wages for gratuity become ₹50,000 instead of ₹30,000. Gratuity per year of service rises from ₹17,308 to ₹28,846.
Tax on Gratuity
- Government employees: fully exempt.
- Other employees: exempt up to ₹20 lakh in a lifetime; anything above is taxed as salary.
Frequently Asked Questions
Can fixed-term employees get gratuity after 1 year?
Yes. Under the Code on Social Security, 2020, in force since 21 November 2025, fixed-term employees are eligible after one year of continuous service.
Is the 5-year rule still valid for permanent employees?
Yes. Permanent employees still need five years of continuous service, except in case of death or disability.
How is gratuity calculated?
Last drawn wages × 15 ÷ 26 × years of service, where six months or more in the last year counts as a full year.
Is gratuity taxable?
For private-sector employees, gratuity up to ₹20 lakh is exempt. Government employees' gratuity is fully exempt.
This guide explains general rules for educational purposes and reflects the law as reviewed in October 2026. It is not tax or legal advice. For your own situation, please consult a Chartered Accountant or the official Income Tax Department and GST portals.