Gratuity Rules 2026: Eligibility and Calculation Under the New Code

Since 21 November 2025, gratuity is governed by Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. A regular employee needs 5 years of continuous service (not needed on death or disablement), while a fixed-term employee gets pro-rata gratuity after 1 year. The amount is last wages ÷ 26 × 15 × completed years, with a part-year of more than six months counted as a full year, up to a ceiling of ₹20 lakh.

Who is eligible

Gratuity is payable when employment ends: on superannuation, retirement, resignation, death, or disablement due to accident or disease, and also on termination of a fixed-term contract.

• Regular employees: need at least 5 years of continuous service. The 5-year condition does not apply when employment ends because of death or disablement. In case of death, the gratuity goes to the nominee or, if none, the legal heirs.
• Fixed-term employees: the Code gives them gratuity on a pro-rata basis once they complete 1 year of service. This is the biggest practical change from the old Act.
• Continuous service includes service interrupted by sickness, accident, authorised leave, lay-off, strike that is not illegal, or a cessation of work not due to the employee’s fault.

How to calculate gratuity: worked example

The formula is 15 days’ wages for every completed year of service. Monthly wages are divided by 26 (working days) to get the daily rate.

Example: Neha worked in a Pune IT services company for 7 years and 8 months. Her last drawn wages (basic pay plus dearness allowance, adjusted under the 50% rule below) were ₹40,000 a month.

1. Service: 7 years and 8 months. The extra 8 months is more than 6 months, so it counts as 8 years.
2. Daily wage for 15 days: ₹40,000 × 15 ÷ 26 = ₹23,076.92 per year of service.
3. Gratuity: ₹23,076.92 × 8 = ₹1,84,615.38, which rounds to ₹1,84,615.

Had she left after 7 years and 5 months, only 7 years would count, and the figure would be ₹1,61,538.46.

The 50% wage rule and the ₹20 lakh ceiling

The Labour Codes use one definition of “wages”. Basic pay, dearness allowance and retaining allowance are wages. Many allowances are excluded, but there is a catch: if the excluded allowances exceed 50% of total remuneration, the amount above 50% is added back to wages. This stops employers from keeping basic pay artificially low to shrink gratuity.

Example: Total pay ₹1,00,000, of which basic plus DA is ₹30,000 and allowances are ₹70,000. Allowances are ₹20,000 above the 50% mark, so wages for gratuity become ₹50,000.

The maximum gratuity payable under the Code is ₹20 lakh. An employer can pay more under a contract or a better scheme. Under the Income-tax law, gratuity received by a private sector employee is exempt up to ₹20 lakh, and this limit applies over the whole working life, not per employer.

Nomination

Every employee should file a gratuity nomination with the employer after completing the period specified in the rules. If you have a family, the nomination should be in favour of family members. Update it after marriage or the birth of a child. A missing nomination is the most common reason families struggle to get gratuity after an employee’s death.

What to do if gratuity is not paid

1. Make a written claim. Apply to the employer in writing for payment. The employer must determine the amount, inform you and the competent authority, and arrange payment within 30 days from the date it becomes payable (s.56(3)).
2. Claim interest for delay. If the employer delays, it must pay simple interest at a rate not exceeding the rate notified by the Central Government for repayment of long-term deposits (s.56(4)), unless the delay was the employee’s fault and the authority permitted it.
3. Send a legal notice if there is no response. See how to send a legal notice in India.
4. Apply to the competent authority. Disputes about the amount or eligibility go to the competent authority appointed under the Code, which can hold an inquiry and direct payment. An appeal against its order lies within 60 days, extendable by another 60 days for sufficient cause.

Keep your appointment letter, salary slips, resignation acceptance and relieving letter. For how the new Codes change offer letters, see appointment letters under the new labour codes.

Frequently asked questions

I resigned after 4 years and 8 months. Do I get gratuity?

Ordinarily no, because a regular employee needs 5 years of continuous service. Courts have taken different views on counting a final part-year towards the 5-year condition, so if you are very close, get advice on your facts before you resign.

Does a fixed-term employee with 1 year get gratuity?

Yes, pro-rata, under the Code on Social Security, 2020.

Can an employer forfeit gratuity?

Only in limited cases set out in the Code: to the extent of loss caused by wilful damage to the employer’s property, or wholly or partly where the employee is terminated for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment. It cannot be withheld as a pressure tactic.

Is gratuity taxable?

For private employees, exempt up to ₹20 lakh in a lifetime; anything above is taxable as salary.

Does gratuity apply to small offices?

The gratuity chapter applies to establishments covered by the Code, broadly those with 10 or more employees. Check whether your establishment is covered.

Quick quiz

For a clear course on wages, gratuity and other work rights, see Everyday Law for Every Indian.

Sources

• Code on Social Security, 2020, Chapter V, sections 53 to 58 (in particular s.53, s.56(3), s.56(4), s.56(8), s.58)
• Code on Wages, 2019, section 2(y) (definition of wages and the 50% proviso)
• Payment of Gratuity Act, 1972 (repealed)
• Income-tax law, exemption for gratuity up to ₹20 lakh

This page is for education and general information, not legal advice for a specific case. Law as on 29 October 2026.