Gratuity in India 2026 — How It's Calculated, Who's Eligible, and What Changed in November 2025
Gratuity in India 2026 — How It's Calculated, Who's Eligible, and What Changed in November 2025
What's in this guide
What Is Gratuity and Who Pays It?
Gratuity is a statutory lump-sum payment made by an employer to an employee as recognition of long-term service. It is not a bonus or a gift — it is your legal right under the Payment of Gratuity Act, 1972, now consolidated into the Code on Social Security, 2020, which came into full effect on November 21, 2025.
Every business with 10 or more employees is legally required to pay gratuity. It becomes payable when an employee retires, resigns after qualifying service, is laid off, or in the event of death or permanent disability. The 4.81% figure you see in your CTC is the employer's annual accrual for this future payment.
Who Is Eligible — The Complete Rules
| Employee Type | Minimum Service Required | Notes |
|---|---|---|
| Permanent / regular employee | 5 continuous years | Unchanged from old rules. If your last year is 4 years 8+ months, many employers and courts round up to 5. |
| Fixed-term contract employee | 1 year (NEW from Nov 21, 2025) | Pro-rata on actual completed service. Only for contracts ending after Nov 21, 2025. |
| Death or permanent disability | No minimum | Paid to nominee or legal heir regardless of service length |
| Seasonal worker | Worked at least one season | Calculated at 7 days wages per season |
The Gratuity Formula — With Worked Examples
"Last drawn wages" = Basic salary + Dearness Allowance. Under new labour codes, basic wages must be at least 50% of total CTC.
"15" = 15 days per completed year of service
"26" = statutory working days in a month
Example 1: Permanent employee, 10 years, basic ₹50,000/month
Gratuity = (50,000 × 15 × 10) ÷ 26 = ₹2,88,461
Example 2: Fixed-term contract, 2 years, basic ₹30,000/month (new rules)
Gratuity = (30,000 × 15 × 2) ÷ 26 = ₹34,615
Under old rules, this person received ₹0. Under November 2025 rules: ₹34,615.
Example 3: Employee dies after 3 years, basic ₹40,000/month
Gratuity to nominee = (40,000 × 15 × 3) ÷ 26 = ₹69,230 (no 5-year minimum for death)
What Changed in November 2025 — Complete Summary
| Rule | Before Nov 21, 2025 | After Nov 21, 2025 |
|---|---|---|
| Permanent employee eligibility | 5 continuous years | 5 continuous years (unchanged) |
| Fixed-term / contract workers | No entitlement unless 5 years | 1 year — pro-rata payout |
| Wage definition for calculation | Basic + DA only (many companies kept basic very low) | Basic must be ≥50% of CTC; excess allowances treated as wages |
| Payout timeline | 30 days from eligibility | 30 days (unchanged) — interest if delayed |
| Tax-exempt ceiling (private sector) | ₹20 lakh | ₹20 lakh (unchanged) |
| Payout increase (typical employee) | — | 40–70% higher due to 50% wage rule |
Is Gratuity Taxable?
| Employee Type | Tax-exempt up to | Above the limit |
|---|---|---|
| Private sector (covered by Act) | ₹20 lakh | Taxable as salary income |
| Government employees | Fully exempt — no ceiling | N/A |
For most private sector employees, gratuity up to ₹20 lakh is completely tax-free. The 4.81% gratuity provision inside your CTC is not taxable while you are employed — you pay no tax until you actually receive it, and even then, amounts under ₹20 lakh are exempt.
Common Questions Answered
Can I get gratuity if I resign before 5 years?
For permanent employees — no, unless death or permanent disability. For fixed-term contract employees hired after November 21, 2025 — yes, you are entitled to pro-rata gratuity after 1 year. For permanent employees with 4 years 8+ months service, many courts interpret this as 5 completed years — check your employer's HR policy.
Is the gratuity shown in my CTC actually paid to me?
Not monthly. The 4.81% in your CTC is the employer's annual accrual. It is only actually paid when you become eligible — on resignation after 5 years, retirement, death, or disability. If you leave before qualifying, the employer keeps it.
What if my employer refuses to pay gratuity?
File a formal complaint with the Controlling Authority — typically the Assistant Labour Commissioner in your region. Employers who fail to pay within 30 days of eligibility must pay interest on the delayed amount. EPFO also has grievance mechanisms under the new codes.
Does gratuity appear in my full and final settlement?
Yes — your F&F settlement must explicitly show any gratuity entitlement, along with last month's salary, leave encashment, and pending reimbursements. Get a written F&F statement that shows gratuity (or zero with reason) before signing any settlement.
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