Gratuity Rules India 2026: Complete Guide

Gratuity is a retirement benefit paid by an employer to an employee as a reward for long and meritorious service. It is governed by the Payment of Gratuity Act, 1972.

Gratuity is payable when an employee leaves the organization after completing at least 5 years of continuous service. The departure can be due to resignation, retirement, superannuation, death, or disablement.

The Act applies to every factory, mine, oilfield, plantation, port, and railway company, and every shop or establishment employing 10 or more employees on any day of the preceding 12 months.

For monthly-rated employees covered under the Act:

Where:

• Last Drawn Wages = Basic Salary + Dearness Allowance (DA)
• 26 = Number of working days in a month (as per the Act)
• 15 = Number of days' wages per year of service
• Years of Service = Completed years (service > 6 months in final year rounds up)

Example Calculation

Employee with Basic + DA = ₹60,000/month and 10 years of service:

For Piece-Rated Employees

Gratuity = Average of total wages earned in the last 3 months ÷ total days worked × 15 × years of service. Overtime wages are excluded.

For Seasonal Employees

Gratuity = 7 days' wages for each season worked. A "season" means the period the establishment normally operates in a year.

An employee is eligible for gratuity after completing 5 years of continuous service. However, there are important exceptions:

When Is the 5-Year Rule Waived?

• Death: If the employee dies during service, gratuity is payable to the nominee or legal heirs regardless of service length.
• Disablement: If the employee becomes disabled due to disease or accident, they are entitled to gratuity even with less than 5 years of service.

What Counts as "Continuous Service"?

An employee is deemed to have continuous service if they have worked:

• 240 days in the preceding 12 months (for non-seasonal workers)
• 190 days for employees in mines or with a 6-day work week

Rounding Rule for Service Years

If the service in the final year exceeds 6 months, it is rounded up to the next full year. Exactly 6 months does not round up — only "more than 6 months" triggers the rounding. For example:

• 4 years 6 months = 4 years (does NOT round up)
• 4 years 7 months = 5 years (rounds up)

The maximum tax-exempt gratuity under Section 10(10) of the Income Tax Act is ₹20,00,000 (₹20 lakh).

• Government employees: Gratuity is fully exempt from income tax (no cap applies for tax purposes).
• Private sector employees covered under the Act: Exempt up to ₹20 lakh. Any excess is taxable.
• Employees not covered under the Act: The exempt amount is the least of: (a) ₹20 lakh, (b) half month's salary × completed years, or (c) actual gratuity received.

Note: While the employer can pay gratuity exceeding ₹20 lakh, the amount above the cap is included in taxable income. The government may revise this limit under new labour codes.

The Code on Social Security, 2020 proposes several changes that will impact gratuity calculations when notified:

• Fixed-term employees: Employees on fixed-term contracts of 1 year or more become eligible for gratuity proportionately, eliminating the 5-year service requirement for contract workers.
• Wage definition: "Wages" for gratuity will mean at least 50% of total remuneration. If excluded components (other than basic + DA + retaining allowance) exceed 50% of total pay, the excess is added back to the wage base.
• Gig and platform workers: The Code extends social security benefits (potentially including gratuity-like provisions) to gig and platform workers, though the gratuity section specifically may not cover them directly.