Last drawn basic pay plus dearness allowance, and the years you completed, give the gratuity. Covered jobs use 15/26. Jobs outside the gratuity law use 15/30 for the tax figure. The tax-free line for a non-government employee is ₹20 lakh.
Last drawn monthly basic pay plus dearness allowance. Leave the next two at zero to use only this.
₹
₹5,000₹1.3 Lakh₹2.5 Lakh₹3.8 Lakh₹5 Lakh
Last drawn monthly basic pay plus dearness allowance. Leave the next two at zero to use only this.
HRA, special allowance and similar pay. If these are more than half of the total below, the extra is added to wages.
₹
₹0₹1.3 Lakh₹2.5 Lakh₹3.8 Lakh₹5 Lakh
HRA, special allowance and similar pay. If these are more than half of the total below, the extra is added to wages.
A monthly gratuity provision or retrenchment pay. It raises the half-pay line. It is not itself added to wages.
₹
₹0₹50,000₹1 Lakh₹1.5 Lakh₹2 Lakh
A monthly gratuity provision or retrenchment pay. It raises the half-pay line. It is not itself added to wages.
Whole years only. The five-year test does not round the extra months up.
0 years10 years20 years30 years40 years
Whole years only. The five-year test does not round the extra months up.
More than 6 months counts as one more year in the covered formula. Exactly 6 months does not. Not-covered ignores these months.
0 months3 months6 months8 months11 months
More than 6 months counts as one more year in the covered formula. Exactly 6 months does not. Not-covered ignores these months.
Why the job ended
If the formula is above ₹20 lakh
The tax-free amount still stops at ₹20 lakh either way.
15/26 formula
Gratuity ₹1.5 LakhGratuity₹1.5 Lakh
The formula uses 10 years of ₹26,000 a month.
Formula amount
₹1,50,000₹1,50,000
15/26 × wages × counted years
Years in the formula
1010
10 years
Tax-free
₹1,50,000₹1,50,000
Up to ₹20,00,000 for a non-government employee
Taxable
₹0₹0
Nothing above the tax-free line
Wages used: ₹26,000 a month. Basic pay plus dearness allowance. No 50% add-back. A government employee’s death-cum-retirement gratuity is fully tax-free under Section 19, table item 3. This figure is not that pension-rules sum.
For every completed year, the employer pays 15 days of last drawn wages. A month in this sum is 26 working days, so the factor is 15/26. Wages here start as basic pay plus dearness allowance. Bonus, house rent, and overtime stay out unless the 50% wage check pulls part of them in.
A part of a year counts as one more year only when it is more than six months. That is the phrase in section 4(2) of the Payment of Gratuity Act and in Section 53 of the Code on Social Security, 2020: “part thereof in excess of six months”. Exactly six months is not added.
Five years, and when that rule drops
On resignation or retirement you need five completed years. Four years and eight months is not five. The six-month rounding is used only after you are eligible, to count the amount.
Death and disablement skip the five years. So does the end of a fixed-term contract, once the person has worked one year under that contract. The Ministry of Labour confirmed the one-year rule for fixed-term employees. A seasonal establishment uses 7 days a season, not 15. That path is not calculated.
If the gratuity law does not cover the job
There is then no statutory 15/26 payment. If the employer still pays gratuity under a contract, the tax formula is half a month of salary for each completed year. Half a month is 15/30. Salary is the average of the last 10 months: basic pay, dearness allowance that counts for retirement benefits, and commission on turnover. Extra months are not rounded up.
A worked example
Basic pay plus dearness allowance ₹26,000 a month. Service of 10 years and 7 months, and you resign. The 7 months are more than six, so the count is 11 years. 15/26 × ₹26,000 × 11 is ₹1,65,000. That is under ₹20,00,000, so the whole amount is tax-free.
The same salary, if the gratuity law does not cover the job, uses 10 completed years and 15/30. The tax formula gives ₹1,30,000. The 7 months drop out.
The ministry’s wage illustration: total pay ₹76,000, basic plus dearness allowance ₹20,000, allowances ₹40,000, and ₹16,000 of gratuity and retrenchment left out of the check. Wages become ₹22,000. Over 10 exact years the formula is ₹1,26,923.
₹1,00,000 a month for 40 years gives a formula of ₹23,07,692. The statutory payment stops at ₹20,00,000 unless a contract pays the rest. The extra ₹3,07,692 is taxable.
Tax, and what the labour codes changed
Section 19 of the Income-tax Act, 2025 is the old Section 10(10). table item 5 limits gratuity under the Payment of Gratuity Act to section 4(2) and 4(3) of that Act. table item 6 is any other gratuity. Both stop the exemption at ₹20,00,000 for a non-government employee. table item 3 leaves out a government employee’s death-cum-retirement gratuity in full. The income-tax text still names the 1972 Act. The Code is the payment law from 21 November 2025.
The ceiling of ₹20,00,000 was notified by S.O. 1420(E) dated 29 March 2018. Section 53(3) of the Code also says the Central Government notifies the ceiling. The department’s page still shows ₹20,00,000. Central Rules under the codes were notified on 8 May 2026. Some states were still finishing their own rules in July 2026. Older notifications continue where they do not clash with the codes.
Assumptions and limits
The amount is rounded to the nearest rupee. The Act does not set a rounding rule.
For death and a fixed-term exit, a part of a year still counts only when it is more than six months. The Code also says “pro rata” for those two cases. A shorter fraction is not added here.
Forfeiture for misconduct, a piece-rated employee, and a seasonal establishment are not calculated.
The monthly gratuity line inside CTC, on the in-hand salary page, is 15/26 of one month spread over the year. It is not this exit payment.
This is not the central government pension-rules gratuity. That payment is fully tax-free, and the formula is different.
This is an estimate for learning, not advice. Read the disclaimer.
Questions
Does six months of extra service count as one more year?
Only when it is more than six months. The law says “part thereof in excess of six months”. Ten years and seven months count as 11 years. Ten years and six months stay at 10. This rounding is for the amount. It does not turn 4 years and 8 months into the 5 years you need on resignation.
When is gratuity payable before five years?
Death and disablement do not need five years. From 21 November 2025, a fixed-term employee also gets gratuity when the contract ends, if they completed one year under that contract. Eleven months is not one year. A working journalist’s three-year rule is not calculated here.
Is ₹20 lakh still the tax-free limit?
Yes, for someone who is not a government employee. Section 19 of the Income-tax Act, 2025, table item 5 and table item 6, caps the exemption at ₹20,00,000. That was Section 10(10). The payment ceiling was notified by S.O. 1420(E) dated 29 March 2018. A government employee’s death-cum-retirement gratuity is fully excluded under table item 3. This page does not use the pension-rules formula.
Did the labour codes change the 15/26 formula?
The four labour codes have been in force from 21 November 2025. Central Rules were notified on 8 May 2026. Section 53 of the Code on Social Security, 2020 still pays 15 days’ wages for every completed year, or part of a year beyond six months. What changed is the meaning of wages, and gratuity for a fixed-term employee after one year. An exit on or after that date uses last drawn wages for the whole service. It is not split into a spell before 21 November 2025 and a spell after it.