The statutory formula
Gratuity = 15 ÷ 26 × last drawn monthly wages × completed years of service, with a final part year of more than six months counted as a full year. The 26 reflects working days in a month, so 15/26 of a month's wages is 15 days' pay. Example: ₹50,000 wages and 10 years gives 15 ÷ 26 × 50,000 × 10 = ₹2,88,462. In a seasonal establishment the rate is 7 days' wages for each season.
What changed under the Code on Social Security
The Code on Social Security 2020 came into force on 21 November 2025 and replaced the Payment of Gratuity Act 1972. The formula and the 5-year qualifying service for permanent employees are the same, with no minimum on death or disablement. Two changes matter. Fixed-term employees now qualify after one year of service, pro rata. And "wages" has a single definition across the labour codes: basic pay, dearness allowance and retaining allowance, but if the excluded items (HRA, conveyance, bonus, overtime, commission and similar) exceed 50% of total remuneration, the excess is added back to wages. Salary structures with a low basic therefore produce a higher gratuity.
Ceiling and tax
The statutory gratuity ceiling is ₹20 lakh, the amount notified in March 2018 under the 1972 Act verify — the Code lets the Central Government notify the ceiling, and I have not found a fresh notification under it. An employer can pay more by contract. For tax, s.19 of the Income-tax Act 2025 [10(10)] exempts gratuity received by a government employee in full; for others it exempts the least of the amount received, the statutory amount and ₹20 lakh, a lifetime limit across all employers. The excess is taxed as salary.
Provision in the accounts
Gratuity is a defined benefit. AS 15 (Revised) and Ind AS 19 require the obligation to be measured by the projected unit credit method, using salary escalation, attrition, mortality and a discount rate tied to government bond yields. The company estimate on this page approximates that method for budgeting; the figure in the financial statements needs an actuary's report.
Sources: Code on Social Security 2020 s.53 and Ministry of Labour notification bringing the four labour codes into force on 21 November 2025 (labour.gov.in); Payment of Gratuity Act 1972 s.4 and ceiling notification of 29 March 2018; Income-tax Act 2025 s.19 table entries on gratuity (incometaxindia.gov.in). Checked 6 October 2026.
Common questions
Is 4 years and 8 months enough for gratuity?
Not under the statute for a permanent employee who resigns: the Code and the 1972 Act need five years of continuous service. Some High Court decisions have counted 4 years and 240 days of work as five years in particular facts, but that is not settled for every case. On death or disablement there is no minimum, and fixed-term employees qualify after one year under the Code.
Does the 50% wage rule apply to old service too?
The Code applies to gratuity that becomes payable on or after 21 November 2025, and the formula uses last drawn wages, so the higher wage base applies to the whole period of service for exits from that date.
Is gratuity paid to a fixed-term employee for less than a full year?
Under the Code the fixed-term employee must complete one year of service. After that, gratuity is pro rata to the service, using the same 15/26 formula.
When must the employer pay?
Within 30 days of the gratuity becoming payable. Late payment carries simple interest at the rate notified for long-term deposits.