Gratuity is a lumpsum benefit paid by an employer to an eligible employee when their employment ends under specified circumstances. For many employees, it becomes an important part of the amount they receive when they retire or leave an organisation after completing the required period of service. The rules around gratuity have also changed with the implementation of the Labour Codes from 21 November 2025.
So, if you are wondering whether you are eligible for gratuity, how your gratuity is calculated, and what the new rules mean for you, it helps to start with the basics.
What is gratuity and why do employees receive it?
Gratuity is a statutory benefit paid by an eligible employer to an eligible employee when employment ends due to circumstances such as retirement, resignation or superannuation, subject to applicable rules. It is employer-funded, not a salary deduction or employee contribution. The Social Security Code, 2020 covers specified establishments, including shops and establishments employing 10 or more employees, subject to applicable provisions.
Who is eligible for gratuity in India?
For employees covered by the applicable gratuity provisions, eligibility generally depends on the nature of employment and the circumstances in which employment ends. Key points to understand include:
- Covered establishment: The gratuity provisions apply to specified establishments meeting the applicable criteria.
- Continuous service: For regular employees, the applicable service requirement generally needs to be met for gratuity on retirement, resignation, or superannuation.
- Death or disablement: The five-year service requirement does not apply in cases of death or disablement, subject to the applicable provisions.
- Fixed-term employees: Under the Social Security Code, gratuity is payable on a pro-rata basis for fixed-term employees, as provided under the code.
- Nomination: In the event of death, the applicable gratuity can be paid to the nominee or heirs, as provided under the law.
Does the five-year rule apply to everyone?
No. The five-year requirement is not universal. For a regular employee, gratuity generally requires the applicable period of continuous service. However, the rules provide exceptions, including cases involving death or disablement. Fixed-term employment also has specific provisions under the Social Security Code. This is why your employment type and the reason for termination of employment matter when determining eligibility.
How is gratuity calculated?
For a monthly-rated employee, the commonly used formula under the gratuity provisions is:
Gratuity = Last drawn wages × 15/26 × completed years of service
For calculation purposes, a part of a year exceeding six months is generally treated as a completed year, subject to the applicable provisions. For example, suppose an eligible employee has:
- Last drawn wages: ₹1,00,000 per month
- Completed service: 20 years
The illustrative calculation would be: ₹1,00,000 × 15/26 × 20 = approximately ₹11.54 lakh.
This is an illustration. The actual gratuity payable depends on the applicable definition of wages, employment category, period of service and other provisions.
What salary is considered for gratuity calculation?
The amount used for gratuity calculation is not necessarily your entire monthly salary or take-home pay. The applicable definition of “wages” under the Social Security Code needs to be considered. The Labour Ministry has also clarified the treatment of allowances under the new wage definition, including the 50% rule for certain allowances.
Where applicable allowances and benefits exceed 50% of remuneration, the excess is added back to wages for statutory calculations. This means employees should not simply use their CTC or in-hand salary to estimate gratuity.
What changed in gratuity rules from November 21, 2025?
The Labour Codes came into effect from 21 November 2025, and the Ministry of Labour has clarified that the revised gratuity calculation applies prospectively from that date:
- New wage definition: The definition of wages under the Labour Codes affects statutory calculations, including gratuity.
- 50% allowance rule: Certain allowances exceeding the prescribed 50% threshold can be added back to wages for statutory calculations.
- Fixed-term employment: Fixed-term employees have specific gratuity provisions, including pro-rata payment as provided under the Code.
- Prospective application: The revised gratuity calculation applies from 21 November 2025 rather than retrospectively.
The exact impact on an employee's gratuity depends on their employment structure and wage components.
How does fixed-term employment affect gratuity?
The Social Security Code specifically provides for gratuity for employees engaged on fixed-term employment on a pro-rata basis, subject to the applicable conditions. This is different from simply applying the traditional five-year rule to every employee. If you are employed for a fixed term, check your employment arrangement and the applicable provisions rather than assuming that the regular eligibility rule applies in exactly the same way.
When is gratuity paid?
Gratuity becomes payable when the employee's employment ends under eligible circumstances and the applicable eligibility conditions are met. The Payment of Gratuity Rules provide for an application process, although an eligible employee's entitlement does not simply disappear because an application is not made within the ordinary application period. For a specific claim, employees should check the process followed by their employer and the applicable rules.
Is gratuity taxable in India?
The tax treatment of gratuity depends on your employment category and the applicable income-tax provisions. Under the Income Tax Act, 2025, applicable from Tax Year 2026-27, gratuity is covered under Section 19, subject to the applicable conditions and limits. Previously, gratuity was covered under Section 10(10) of the Income-tax Act, 1961. For specified non-government categories, the current ₹20 lakh ceiling continues to apply, while specified Central and State Government categories have a ₹25 lakh ceiling.
What happens to gratuity if an employee dies?
The five-year service condition does not apply in the case of death. The gratuity payable in such a situation is paid to the nominee, or to the heirs where there is no valid nomination, subject to the applicable provisions. This makes keeping nomination details updated an important part of employment records.
Can gratuity be more than the statutory amount?
Yes, an employer can provide better gratuity terms than the statutory minimum where applicable, such as through an employment agreement, award or other arrangement. The statutory gratuity provisions do not prevent an employee from receiving better terms where they are otherwise applicable. The amount payable to an individual therefore depends on both the statutory provisions and any applicable employment terms.
How can you estimate your gratuity?
You can start with the applicable gratuity formula and your current wage and service details. You can also use the ABSLI Gratuity calculator to get an indicative estimate based on the information you enter. Remember that a calculator provides an estimate. Your actual gratuity will depend on the applicable law, wage definition, employment terms, and your individual service record.
What should you check about your gratuity before leaving a job?
- Service period: Confirm your recorded date of joining and length of service.
- Salary components: Understand which wage components are relevant for the calculation.
- Employment type: Check whether you are a regular or fixed-term employee.
- Nominee: Ensure your nomination details are updated.
- Employer records: Check that your employment and salary records are accurate.
- Calculation: Review the gratuity calculation shared by your employer.
- Tax treatment: Check the applicable tax provisions for the gratuity you receive.
Once you know the amount you may receive, you can separately decide how it fits into your broader financial plans. That decision should not be confused with how gratuity itself is calculated or whether you are eligible for it.
What can you do with your gratuity after retirement?
There are several ways you can use your gratuity, depending on your financial priorities at retirement:
- Meet immediate expenses: Use a portion for relocation, home-related expenses, travel, or other planned retirement needs.
- Clear outstanding liabilities: Consider using part of the amount to reduce or repay Loans or other significant financial commitments.
- Keep an emergency reserve: Set aside an accessible amount for unexpected expenses, particularly healthcare or other needs that may arise during retirement.
- Add to your retirement corpus: If your immediate needs are covered, you can allocate a portion towards your longer-term retirement savings.
- Create a regular income: If you need a predictable source of income after retirement, you can explore pension plans and annuity plans offered by ABSLI.
October 5, 2026
5 mins read
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