For a monthly-rated employee, the usual statutory gratuity estimate is: last-drawn monthly wages ÷ 26 × 15 × completed years of service, counting a final part-year only when it exceeds six months. The key is to use “wages” as defined by law, not basic salary, gross salary or CTC as an automatic substitute. The Code on Social Security, 2020 has applied from 21 November 2025. It retains the familiar 15/26 calculation while introducing a common statutory definition of wages.
Your final amount may still depend on your employment category, salary structure, continuous service record, any better contractual terms, and the notified ceiling.
What is the gratuity formula for a monthly-rated employee?
The formula is last-drawn monthly wages ÷ 26 × 15 × reckonable years of service. “Reckonable years” means each completed year plus a part-year exceeding six months. A part-year of exactly six months is not described as “in excess of six months” and should not be rounded up under this formula.
Formula: Gratuity = (last-drawn monthly wages × 15 × reckonable years) ÷ 26
The divisor of 26 is not based on whether your organisation follows a five-day or six-day working week. It appears expressly in the code for a monthly-rated employee’s 15 days of wages.
Which salary components count as wages?
Start with the statutory definition, not a payslip label. Wages include basic pay, dearness allowance, and retaining allowance, if any. The code lists exclusions such as house rent allowance, conveyance allowance, certain bonuses, employer pension or provident-fund contributions, overtime allowance, commission, and gratuity itself. There is also an add-back rule. If payments falling within the specified exclusions exceed one-half of all remuneration calculated under the definition, the excess is added back to wages.
This is often called the 50% wage rule, but it does not mean “gratuity is always calculated on 50% of CTC”. CTC can include employer costs or benefits that do not map neatly to statutory remuneration. Payroll should calculate the wage base from the actual salary components and the legal definition.
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Payslip item
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Starting treatment under Section 2(88)
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What to verify
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Basic pay
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Included
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Use the last-drawn amount.
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Dearness allowance
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Included
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Use the applicable last-drawn amount.
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Retaining allowance
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Included, if any
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Confirm whether it forms part of the pay structure.
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HRA, conveyance, overtime, commission and specified exclusions
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Generally excluded at first
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Check whether the aggregate exclusions trigger the one-half add-back.
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Employer contributions and non-cash benefits
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Category-specific
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Do not treat total CTC as wages without a component-level review.
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How do you count years of service?
For the amount calculation, count every completed year, and add one more year only if the remaining period exceeds six months. This calculation rule is separate from the eligibility requirement. Most employees claiming retirement or resignation need at least five years of continuous service, but statutory exceptions apply.
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Actual service used for illustration
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Years used in formula
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Reason
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5 years 5 months
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5
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The final part does not exceed six months.
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5 years 6 months
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5
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The Code says “in excess of six months”.
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5 years 7 months
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6
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The final part exceeds six months.
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6 years 8 months
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7
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The final part exceeds six months.
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Continuous service may include certain interruptions such as sickness, accident, authorised leave, lay-off, strike, lockout, or a cessation of work not caused by the employee, subject to the code’s conditions. If records are disputed, obtain a written service statement from HR rather than relying only on calendar dates.
Example 1: Monthly-rated employee
Assume last-drawn statutory monthly wages of ₹60,000 and service of 6 years 8 months. The reckonable service is 7 years because the final part exceeds six months.
- ₹60,000 ÷ 26 = ₹2,307.69 daily wage
- ₹2,307.69 × 15 = ₹34,615.38 for each reckonable year
- ₹34,615.38 × 7 = ₹2,42,307.66
Illustrative gratuity estimate: Approximately ₹2,42,308, before applying any notified statutory ceiling, better contractual benefit, payroll adjustment or tax treatment.
Example 2: Why CTC is not the input
Assume monthly CTC is ₹1,20,000. That figure alone is not enough. Payroll must identify remuneration components under Section 2(88), include basic pay, DA and retaining allowance, apply the listed exclusions, and test whether the exclusions exceed one-half of the relevant remuneration. Only the resulting statutory wage figure should enter the gratuity formula.
If that component-level exercise produces statutory monthly wages of ₹60,000, the calculation can use ₹60,000. The result should not be justified merely by saying that ₹60,000 is half of CTC.
How is gratuity calculated for special categories?
The core principle is still a service-linked benefit based on wages, but the code specifies different treatment for several categories. These rules should not be blended into the standard monthly-rated example.
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Category
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Calculation or eligibility rule
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Piece-rated employee
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Daily wages are the average of total wages received during the three months immediately before termination, excluding overtime.
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Seasonal employee not employed throughout the year
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Seven days’ wages for each season.
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Fixed-term employee
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Gratuity is payable on expiry of fixed-term employment without the general five-year condition and is calculated pro rata. The Ministry’s March 2026 FAQ says an FTE is eligible after rendering service under the contract for one year.
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Death or disablement
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The five-year condition does not apply. Gratuity is payable pro rata. On death, it goes to the nominee or heirs as provided by law.
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Working journalist
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The general five-year expression is treated as three years for the specified category.
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Employee receiving reduced wages after disablement
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Pre- and post-disablement periods are calculated using the respective wage rates.
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A fixed-term employee is directly engaged by an employer under a written contract for a fixed period. Contract labour supplied by a contractor is not automatically the same category. The Ministry states that the contractor bears gratuity liability for its contract labour under the conditions described in its FAQ.
Is gratuity limited to a statutory ceiling?
The code allows the Central Government to notify a maximum statutory amount. It also preserves an employee’s right to better gratuity terms under an award, agreement, or employment contract. Therefore, distinguish the minimum statutory obligation from any more favourable employer policy. Do not assume that the amount payable and the amount exempt from income tax are identical. A benefit may be payable under employment law while some portion is taxable under the applicable income-tax provisions.
How is gratuity taxed in 2026?
Tax treatment depends on the employee category and the law applicable when the gratuity is received. Income Tax Department validation rules for assessment year 2026-27 reflect a ₹20 lakh exemption cap for specified PSU, pensioner and other categories, and ₹25 lakh for Central or State Government and corresponding pensioner categories. The final exemption can also depend on other statutory limits and prior gratuity exemptions.
Tax laws and section numbering can change. Obtain advice from a qualified tax professional for your facts, especially if you received gratuity from more than one employer or the payment exceeds the applicable exemption.
What should you check before accepting the calculation?
A reliable estimate should be traceable to the payroll record. Ask for the wage computation, service dates, and governing policy in writing. A calculator that asks only for “basic salary” or assumes a flat percentage of CTC may not reflect the post 21 November 2025 wage definition.
- Confirm the date employment ended and the event: resignation, retirement, superannuation, death, disablement, or expiry of fixed-term employment.
- Check whether the five-year condition applies or a statutory exception covers the case.
- Reconcile basic pay, DA, retaining allowance, and excluding components with Section 2(88).
- Check whether the one-half add-back changes the statutory wage figure.
- Verify completed service and whether the final part-year exceeds six months.
- Review the employment contract, award, or policy for better terms.
- Treat tax exemption as a separate calculation from gratuity entitlement.
Key takeaway
Use the statutory wage definition first, then apply the 15/26 formula to reckonable service. Keep eligibility, the statutory ceiling, contractual enhancements and tax exemption as four separate checks. If payroll cannot show how it derived “wages”, request a component-level calculation before relying on the estimate.
September 17, 2026
5 mins read
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