Private-sector gratuity in India is calculated under the Code on Social Security, 2020, by a single formula: fifteen twenty-sixths of the last drawn monthly wage — basic pay plus dearness allowance — times the completed years of service. This guide explains who the formula covers, the five-year rule and its exceptions, what belongs in the wage and what does not, and how to check the figure your employer produces.

Who the private-sector gratuity covers

Gratuity in India is a statutory benefit for employees in establishments covered by the Code on Social Security, 2020, which succeeded the Payment of Gratuity Act, 1972, as the governing law from 21 November 2025. The Code’s Chapter V, Section 53, carries forward the gratuity framework: an employee who completes the qualifying period of continuous service becomes entitled to gratuity, payable by the employer when the employment ends. The private sector — factories, shops, offices, companies of every size above the coverage threshold — is the heart of the system: the law was written for the ordinary employee of an ordinary business, and its rules are built around the ordinary pattern of a career in one establishment. Government employees are covered by separate gratuity arrangements, notably death-cum-retirement gratuity, which use different formulas and different ceilings; this guide is about the private sector, and the government system is mentioned only to keep the two apart.

Coverage turns on the establishment, not on the employee’s job title. An establishment covered by the Code must pay gratuity to its eligible employees, whether they are managers or manual workers, whether they are paid monthly or daily, and whether they work in the head office or a branch. The employee’s own position matters at the edges: apprentices and certain trainees may fall outside the definition of employee for this purpose, and an employee who is dismissed for misconduct involving moral turpitude or for riotous conduct or wilful damage may forfeit gratuity in whole or in part, under the forfeiture provisions. Those are exceptions, and they are narrow: the ordinary private-sector employee, in an ordinary covered establishment, who completes the qualifying service, is entitled, and the burden of showing an exception lies with the employer who claims it.

The five-year rule, and its exceptions

The qualifying rule is five years of continuous service. An employee who completes five years becomes entitled to gratuity; an employee who leaves before five years is generally not entitled, and the calculator on the hub page reflects that by warning below five years. Two exceptions complete the picture, and both matter. The first is death or disablement: where employment ends because the employee dies or is disabled by accident or disease, gratuity is payable even though five years were not completed, because the law does not punish a career cut short by tragedy. The second is the rounding rule: service of six months or more in the final year counts as a full year, so an employee with five years and seven months of service is calculated as six years, while an employee with five years and four months is calculated as five. The six-month rule is part of the formula, not a favour, and it is the reason the years in a gratuity calculation are whole years, rounded in the employee’s favour at the six-month mark.

Continuous service is the measure, and it has its own definition. Service is continuous even if it is interrupted by sickness, accident, leave, a lay-off, a strike that is not illegal, or a cessation of work not due to the employee’s fault. What breaks continuity is a break the law recognises as breaking it: a voluntary departure followed by a fresh engagement is a new service, not a continuation, unless the establishment’s own rules or a settlement treat it as continuous. An employee who moves between establishments in the same group does not automatically carry continuity with them; each establishment is a separate employer for gratuity purposes unless the arrangement says otherwise. The service record — joining date, breaks, leaving date — is therefore the foundation of the calculation, and it should be established from the employer’s records and the employee’s own documents before any figure is computed.

The 15/26 formula, explained from first principles

Every private-sector gratuity calculation in India starts from the same line, fixed by Section 53 of the Code: gratuity equals fifteen twenty-sixths of the monthly wage, multiplied by the number of completed years of service. The monthly wage for this purpose is the last drawn wage — basic pay plus dearness allowance — and the completed years are whole years with the six-month rounding rule applied. In symbols: Gratuity = (15 ÷ 26) × (Basic + DA) × Years. The fraction 15/26 is not arbitrary: it represents fifteen days’ wages out of a 26-day working month, so the formula pays fifteen days’ wages for each year of service, at the wage rate in force at the end of service. A worker who served twenty years receives fifteen days’ wages twenty times over, which is 300 days’ wages — just under a full year’s pay — and that proportion is the shape of the benefit: a little under a month’s pay per year of service, accumulated over a career.

The formula’s three inputs each deserve a sentence. The monthly wage is the last drawn wage, not an average over the career and not the wage at joining: a pay rise in the final year raises the whole gratuity, because every year of service is paid at the final rate. The years are completed years with six-month rounding, as described above. And the fraction is fixed: fifteen days per year, whatever the establishment, whatever the industry. An employer may pay more — many do, through a more generous formula in the contract or a settlement — but may not pay less than the statutory formula, and a calculation that uses a different fraction, a different wage, or a different year count is not the statutory calculation, however carefully it is done.

Worked examples at stated wages, using the statutory 15/26 formula with whole years of service. The last drawn wage applies to every year; a final-year pay rise raises the whole amount. Figures are rounded to the nearest rupee.

Basic pay, DA, and the last drawn salary

“Basic pay plus dearness allowance” is the phrase that decides most private-sector gratuity disputes, because it is the phrase that decides what is in and what is out. Basic pay is the fixed core of the wage, set by the pay scale or the appointment letter. Dearness allowance is the cost-of-living component linked to the price index, paid as a percentage of basic pay or as a fixed amount, and it is included because the law says the wage for gratuity is basic plus DA. Everything else — house rent allowance, transport allowance, special allowances, overtime, bonuses, commission, and the employer’s pension contribution — is excluded from the statutory wage, however large it may be. An employee whose monthly package is ₹80,000, of which ₹40,000 is basic, ₹8,000 is DA, and ₹32,000 is allowances, has a gratuity wage of ₹48,000, not ₹80,000. The gap between the package and the gratuity wage is the single most common source of disappointment in gratuity calculations, and it is entirely a matter of definition: the law pays gratuity on the wage it defines, not on the package the employee receives.

Three questions settle the wage in any individual case. First, what does the appointment letter and the pay structure call basic pay, and is that label genuine — a basic pay set artificially low, with the balance dressed as allowances, to reduce gratuity and provident fund liabilities, is a label the authorities and courts look through, and the real wage structure governs. Second, what is the dearness allowance, and is it a genuine DA linked to the cost of living, or a fixed allowance wearing the DA label? Third, what was the last drawn wage — the wage in the final month of service, including any rise effective in that month, but excluding one-off payments in that month that are not part of the wage? The payslip for the final month, read with the appointment letter, answers all three, and the calculation should be built from those documents, not from the monthly package total.

Daily-rated and piece-rated workers need a conversion the monthly formula does not directly provide. For a daily-rated worker, the monthly wage is derived from the daily wage over the working days the law’s framework contemplates, and for a piece-rated worker from the average earnings over the relevant period. The principle is the same — fifteen days’ wages per year of service, at the rate in force at the end — but the wage must first be put on a monthly footing by the method the law provides for that category. A daily-rated worker’s gratuity calculated by multiplying a daily wage by fifteen and by the years, without the monthly conversion, understates the amount, because the formula’s fraction is defined on a monthly wage. The conversion is part of the calculation, not an optional refinement.

Gratuity without DA, and salary structures that hide it

Many modern pay structures have no separate dearness allowance: the salary is a single consolidated figure, or a basic pay plus a basket of allowances with no DA line. The question then is whether the gratuity wage is the basic pay alone, or the basic pay plus some part of the consolidated figure that functions as DA. The answer turns on the structure’s substance. Where the pay structure genuinely has no DA component — a common position in information technology and services, where pay is reviewed annually as a whole — the gratuity wage is the basic pay, and the calculation proceeds on that figure. Where a part of the pay is in substance a cost-of-living component, however it is labelled, the employee has an argument that it forms part of the wage for gratuity purposes, and the argument is settled by the documents: the appointment letter, the pay structure circular, and the employer’s own treatment of the component for provident fund purposes, where the same wage definition is in issue.

The practical advice for an employee in a no-DA structure is to establish the position before the calculation matters, not after employment ends. Ask, in writing, which components of the pay structure the employer treats as basic pay and DA for gratuity purposes, and keep the answer with the appointment letter. An employer who answers clearly has removed the dispute; an employer who will not answer has revealed that the dispute exists, and the employee can then take advice with the documents in hand. The worst position is to discover, at the end of twenty years, that the basic pay on record is half the monthly package, with no document explaining why. The wage structure is set at joining; the gratuity consequence arrives at leaving; the time to check is joining.

The ceiling, the tax, and amounts above the formula

The statutory gratuity is subject to a ceiling on the tax-free amount: gratuity up to ₹20,00,000 (₹20 lakh) is exempt from income tax under Section 10(10) of the Income-tax Act, and the excess over that figure is taxable as salary. The ceiling is a tax ceiling, not a payment ceiling: an employer may pay more than ₹20 lakh — under a more generous contract formula, or as an ex-gratia payment — and the excess is simply taxable, not unlawful. The distinction matters because it is commonly misread in both directions: employees who believe no gratuity above ₹20 lakh can be paid, and employers who treat the ceiling as a cap on what they owe. Neither is right. The formula produces what it produces; the ceiling decides how much of it is tax-free.

The interaction with the formula is mechanical. Compute the gratuity under the 15/26 formula, at the last drawn wage, for the completed years. If the result is within ₹20 lakh, the whole amount is tax-free. If it exceeds ₹20 lakh, the excess is taxable as salary in the year of receipt, and the employee should plan for the tax on that excess rather than discovering it at filing time. Where the employer pays more than the statutory amount — a contractual formula, a settlement, an ex-gratia top-up — the excess over the statutory amount is also taxable, and the payslip and the employer’s certificate should show the split: statutory gratuity, additional payment, and the tax treatment of each. The split is what the tax return needs, and it is worth asking for it in writing at the time of payment.

Private sector versus government, and fixed-term staff

The private-sector formula and the government system differ in every element: the government gratuity — death-cum-retirement gratuity — is calculated on a different basis, with different qualifying rules and different ceilings, and it is not modelled by the 15/26 formula. A private-sector employee who moves to government service, or the reverse, starts a new gratuity history under the new system; the years do not combine into one calculation, and the two payments, if both become payable, are calculated separately. The distinction is worth stating because the two systems share a name and a purpose, and the shared name invites the mistaken transfer of one system’s rules to the other’s calculation.

Fixed-term employees deserve a specific note, because the Code on Social Security, 2020, improved their position: fixed-term staff are entitled to gratuity on a pro-rata basis after one year of service, rather than after five. The change recognises that fixed-term work is real work, and that a five-year rule written for permanent careers excluded a growing part of the workforce entirely. A fixed-term employee with between one and five years of service, whose contract is genuinely fixed-term, should therefore calculate on the pro-rata basis the Code provides, not on the five-year rule that applies to permanent staff. The distinction turns on the contract: a contract that is fixed-term in name but permanent in substance — renewed indefinitely, with no genuine term — is not fixed-term for this purpose, and the employee’s rights follow the substance, not the label.

Checking your gratuity: a worked audit

Take a private-sector employee with a last drawn basic pay of ₹50,000, dearness allowance of ₹10,000, and twelve years and eight months of continuous service. The wage is ₹60,000. The service rounds to thirteen years under the six-month rule. The gratuity is (15 ÷ 26) × ₹60,000 × 13 = ₹4,50,000. The audit is five questions. Was the wage the last drawn basic plus DA, with allowances excluded? Was the service continuous, with no break the law recognises? Was the rounding applied — eight months is more than six, so thirteen years, not twelve? Was the result within the ₹20 lakh tax-free ceiling, so that no tax is due? And was any contractual top-up, beyond the statutory figure, shown separately? A yes to all five means the figure is the statutory amount. A no to any one names the correction: a wage that included allowances overstates it, a service count that ignored the rounding understates it, and a figure built on the CTC package is not the statutory figure at all.

Where the employer’s figure differs from yours, the difference should be reconcilable line by line: wage, years, fraction, ceiling. Ask for the employer’s working — the wage used, the service counted, the formula applied — in writing, and compare it with your own working, line by line. A difference in the wage line is a dispute about the pay structure; a difference in the years line is a dispute about the service record; a difference in the fraction line is not a dispute at all, because the fraction is fixed by law. Most gratuity disputes resolve once the two workings are placed side by side, because the formula leaves so little room for judgement. The judgement is all in the inputs, and the inputs are all in the documents.

Frequently asked questions

How is gratuity calculated for private-sector employees in India?

Under the Code on Social Security, 2020 (Section 53), gratuity equals (15 ÷ 26) × the last drawn monthly wage (basic pay plus dearness allowance) × the number of completed years of service, with service of six months or more in the final year counting as a full year. The employee must complete five years of continuous service, except where employment ends by death or disablement, and fixed-term staff are entitled on a pro-rata basis after one year.

Is DA included in the gratuity calculation?

Yes. The statutory wage for gratuity is basic pay plus dearness allowance. House rent allowance, transport allowance, special allowances, overtime, bonuses and commission are excluded, however large they are. Where a pay structure has no separate DA line, whether any part of the pay functions as DA depends on the substance of the structure and the documents — the appointment letter and the pay structure circular decide it.

What does last drawn salary mean for gratuity?

It means the monthly wage — basic pay plus dearness allowance — in the final month of service, including any pay rise effective in that month. It is not an average over the career and not the wage at joining: every year of service is paid at the final rate, so a final-year rise raises the whole gratuity. One-off payments in the final month that are not part of the wage are excluded.

Is gratuity taxable in India?

Gratuity up to ₹20,00,000 (₹20 lakh) is exempt from income tax under Section 10(10). The excess over ₹20 lakh is taxable as salary in the year of receipt. The ceiling is a tax ceiling, not a payment ceiling: an employer may pay more under a more generous contract formula, and the excess is simply taxable. Any contractual top-up beyond the statutory amount is also taxable and should be shown separately.

What if I leave before completing 5 years?

Gratuity is generally not payable before five years of continuous service, except where employment ends because of death or disablement, in which case it is payable regardless of the length of service. Fixed-term employees are entitled on a pro-rata basis after one year. An employee who leaves before five years without one of these exceptions has no statutory claim, though the employer may pay an ex-gratia amount voluntarily.

Can my employer pay more gratuity than the formula gives?

Yes. The statutory formula is a floor, not a ceiling: an employer may pay more under a contract, a settlement or an ex-gratia arrangement, and many do. The excess over the statutory amount is taxable, and it should be shown separately from the statutory gratuity on the payslip and the employer’s certificate, so the tax return can treat each part correctly.