Gratuity rules in India 2026: eligibility, formula and the new labour codes

Gratuity is a lump sum the employer pays when a job ends, if the law or the contract says so. It is not deducted from your salary each month, and it is not the balance in your provident fund. For a covered employee the sum is 15 days’ wages for each counted year, on the last drawn basic pay and dearness allowance, and the amount payable under the Act stops at ₹20,00,000.

The four labour codes, including the Code on Social Security, have been in force from 21 November 2025. That date is the one in the Ministry of Labour FAQ of 16 March 2026 and in the Lok Sabha reply of 20 July 2026. Use the gratuity calculator for your own wage and years. The worked example on this page is a payslip we made up so the arithmetic is visible.

Who is covered by the gratuity law?

Section 1(3) of the Payment of Gratuity Act, 1972 draws a line. Every factory, mine, oilfield, plantation, port and railway company is covered as a class. A shop or establishment is covered when it employed, or employs, 10 or more people on any day in the preceding 12 months. The same headcount applies to any other establishment the Central Government notifies. It is not a rule that every workplace in India needs 10 people before gratuity exists.

Gratuity is payable on superannuation, retirement, resignation, or death or disablement, after continuous service of not less than 5 years. The five years are not required when the end of the job is due to death or disablement. On death, the money is paid to the nominee, or to the heirs if there is no nominee.

Someone the Act does not cover has no statutory 15/26 payment. A contract can still promise a sum. The tax rule for that “any other gratuity” is a different formula, and it is set out below.

What counts as continuous service?

Continuous service is uninterrupted service. It includes sickness, accident, leave, absence without leave unless an order treats the absence as a break, lay-off, strike, lock-out, and a stoppage that is not the employee’s fault.

Section 2A also deems a year continuous when the employee has actually worked enough days in the 12 months before the year ends. The day count depends on the workplace.

The 5-year qualifying test uses completed years. A part of a year is not rounded up for that test. Rounding matters only inside the payment formula.

How is the gratuity amount worked out?

For a covered, monthly-rated employee the law turns the 15-day rule into a fraction. 15 days’ wages on a 26-day month is 15/26 of the last drawn wages, multiplied by the counted years. A part of a year counts as a full year only when it is more than 6 months. Exactly 6 months do not round up. A seasonal establishment that does not run through the year pays 7 days’ wages for each season.

Wages for this sum are last drawn. Under the Code, for an exit on or after 21 November 2025, that last-drawn wage is used for the whole of the service. The FAQ says the service is not split into a spell before that date and a spell after it.

Salary in that second row is basic pay, dearness allowance that counts for retirement benefits, and commission on turnover.

What is the ceiling?

Section 4(3) of the Act says the gratuity payable shall not exceed the amount the Central Government notifies. S.O. 1420(E) dated 29 March 2018 set that amount at ₹20,00,000. The Ministry of Labour records the same change, from ₹10,00,000 to ₹20,00,000, on 29 March 2018. The income-tax department’s threshold page still shows ₹20,00,000.

Section 53 of the Code on Social Security, 2020 leaves the ceiling to a Central Government notification. No higher figure is used here. A contract can pay more than the ceiling. The tax-free amount for a non-government employee still stops at ₹20,00,000.

What did the labour codes change?

Section 53 of the Code on Social Security, 2020 is the gratuity chapter in the Code on Social Security, 2020. The ministry FAQ dates the codes, and the rules that were in force with them, from 21 November 2025. Central Rules under the codes were notified on 8 May 2026. PIB’s release of 22 November 2025 states two changes and does not itself print that calendar date.

First, fixed-term employees. The eligibility requirement moves from 5 years to 1 year. Where the employee completes one year of continuous service, gratuity applies on a proportionate basis. The FAQ’s test is service under the contract for one year from the start of the contract. An exit before that contracted year does not pick up a shorter cut-off from the FAQ.

Second, wages. Wages include basic pay, dearness allowance and retaining allowance. If the other payments, such as bonus, house rent allowance, conveyance, overtime and commission, are more than 50% of all remuneration, the excess is added back into wages. Section 2(y) of the Code on Wages, 2019 is the definition the calculator uses. Gratuity payable on termination, and retrenchment compensation, stay outside that half. The gratuity calculator can add the excess back. The worked example leaves allowances at zero, so there is nothing to add.

What is already in force is the payment formula, the one-year fixed-term test, last-drawn wages for the whole service on an exit on or after 21 November 2025, and the 50% add-back. The ceiling is still the notified ₹20,00,000. Nomination is still Form F under the 1972 Central Rules. The March 2026 FAQ does not name a replacement form.

When can gratuity be forfeited, and who do you nominate?

Section 4(6) of the Act, as the ministry still publishes it, has two grounds. If the employee is terminated for a wilful act, omission or negligence that causes damage, loss or destruction of the employer’s property, gratuity is forfeited to the extent of that damage or loss. The gratuity may be forfeited wholly or in part if the employee is terminated for riotous or disorderly conduct, or any other act of violence, or for an offence involving moral turpitude committed in the course of employment. The March 2026 FAQ does not restate these grounds. This page does not treat them as repealed.

You nominate the person who receives the gratuity if you die. Section 6 of the Act is the nomination. Rule 6 of the 1972 Central Rules says the nomination is in Form F, in duplicate. The employer returns an attested copy. File it while you are in service, and file a fresh form if the family changes. On death without a nominee, the heirs claim.

How soon must gratuity be paid, and how do you claim it?

Section 7(3) says the employer shall arrange to pay the gratuity within 30 days from the date it becomes payable. Section 7(3A) says that if it is not paid in that period, the employer pays simple interest from the date it became payable until the date of payment. The rate cannot exceed the rate notified for long-term deposits. S.O. 874(E) dated 1 October 1987 specifies 10% a year. No interest is payable if the delay is the employee’s fault and the employer has written permission from the controlling authority.

Claim it in that order. Apply to the employer. The Central Rules give the employer a form for that application. If the employer refuses, rejects the claim, or does not answer, apply to the controlling authority. An appeal against the controlling authority’s order can be filed within 60 days. A different section of the Act, used when the collector recovers unpaid gratuity, is a separate interest rule. Do not mix that recovery rate with the 10% on a late payment under section 7(3A).

How is gratuity taxed?

Section 10(10) of the old Income-tax Act is Section 19 of the Income-tax Act, 2025. The section-number guide maps the row. Three lines matter.

table item 3 excludes a government employee’s death-cum-retirement gratuity in full. Statutory corporations are not in that full exclusion. table item 5 excludes gratuity under the Payment of Gratuity Act, limited to what section 4(2) and section 4(3) of that Act allow, so the ₹20,00,000 ceiling still applies. table item 6 is any other gratuity: the least of the amount received, the notified limit of ₹20,00,000, and half a month’s salary for each completed year of service. That half month is the 15/30 row in the table above.

The department’s page still prints the old section number next to ₹20,00,000. The exemption amount did not change because the section number did. The gratuity calculator shows the tax-free piece beside the formula amount.

How does gratuity compare with EPF and NPS?

The three are easy to mix because all of them show up when a job ends. They are built differently.

EPF withdrawal, the five-year exclusion and the forms are in the EPF guide. How NPS pays out at 60 is in the NPS guide. A monthly salary before any of this is the in-hand salary calculator. A retire-at-60 plan that needs a corpus, not a single lump sum, is the retirement calculator.