Gratuity Rules 2026: Eligibility, Calculation & How to Claim

Thousands of employees resign or retire every year without ever checking whether their employer calculated their gratuity correctly. Some simply accept whatever number appears on the settlement letter. Others don’t even realize they’re legally entitled to this benefit in the first place. Given the recent overhaul under the Gratuity Rules 2026, that kind of oversight has become harder to justify, since the changes genuinely affect how much money lands in your account.

This guide walks you through exactly what changed, who benefits the most, and how to calculate your own payout accurately.

What Is Gratuity?

Gratuity is a statutory lump-sum benefit that your employer pays when you leave a company, whether through resignation, retirement, or in unfortunate cases, death or disablement. Unlike a bonus, which rewards performance, gratuity rewards loyalty and long service. Think of it as your employer’s way of saying “thank you for sticking around,” backed not by goodwill alone but by actual law.

Latest Update: Code on Social Security, 2020 Changes Gratuity Rules

On 21 November 2025, the Government of India officially notified the Code on Social Security, 2020, replacing the framework that the Payment of Gratuity Act, 1972 had governed for over five decades. This single event reshaped gratuity rules for the first time in a generation, and every employer across India must now comply with the revised structure.

Two changes stand out above everything else:

• Fixed-term and contract employees now qualify for pro-rata gratuity after just 1 year of service, instead of the earlier 5-year requirement.
• Basic salary plus dearness allowance must now equal at least 50% of total CTC, which directly increases the gratuity calculation base for many employees.

Meanwhile, several things have stayed exactly the same — the core formula, the 5-year eligibility rule for permanent employees, and the ₹20 lakh tax exemption cap all remain unchanged.

Why This Rule Change Matters

For years, many companies deliberately kept basic salary low — sometimes just 20-30% of CTC — and paid the rest as allowances. This structure reduced their PF and gratuity obligations significantly. The new 50% wage rule closes that loophole permanently, so if your salary structure previously worked this way, expect your gratuity payout to rise, even though your monthly take-home might shrink slightly as a result.

Gratuity Eligibility Criteria

General Gratuity Rules: 5 Years of Continuous Service

Permanent employees still need to complete 5 years of continuous service with an employer before qualifying for gratuity. This threshold hasn’t changed under the new code.

The “4 Years and 240 Days” Exception

Here’s a detail many employees overlook. Under Section 2A of the Act, if you complete 240 days of work in your fifth year, the law counts that entire year as a full year of service. Practically speaking, this means someone with roughly 4 years and 8 months of tenure can often legally claim gratuity, since 240 working days typically falls around that mark.

Death and Disablement: No Minimum Service Required

The 5-year rule doesn’t apply if an employee dies or becomes disabled due to an accident or disease. In these situations, gratuity becomes payable regardless of tenure, and the amount goes to the employee’s nominee or legal heir.

Fixed-Term & Contract Employees: The New 1-Year Rule

If a company hires a developer on a 1-year contract, that employer must now pay gratuity once the contract ends, calculated on a pro-rata basis for the actual period worked. This puts contract workers on far more equal footing with permanent staff regarding terminal benefits, which is a genuinely significant shift for industries that rely heavily on fixed-term hiring — manufacturing, logistics, and retail, in particular.

One important caveat: this 1-year rule specifically covers employees hired directly by a company. Workers deployed through a staffing or manpower agency generally remain the legal responsibility of that agency, not the client company where they actually work.

Gratuity Calculation Formula

The core formula hasn’t changed, though the wage base feeding into it often has, thanks to the 50% rule discussed earlier.

For Organizations Covered Under the Act

Gratuity = (Last Drawn Wages × 15 × Years of Service) ÷ 26

Here, “26” represents the average working days in a month, since the formula assumes four weekly offs.

For Organizations Not Covered Under the Act

Gratuity = (Last Drawn Wages × 15 × Years of Service) ÷ 30

In this version, “30” accounts for all calendar days, and the calculation typically uses average salary over the last 10 months rather than just the final month’s pay.

Gratuity Calculation Example

Numbers always clarify things faster than formulas alone, so here’s a practical example. Suppose an employee’s last drawn Basic plus DA is ₹50,000 per month, and they’ve completed 10 years and 7 months of service. Since 7 months exceeds the 6-month rounding threshold, the law rounds this up to 11 years.

Gratuity = (₹50,000 × 15 × 11) ÷ 26 = ₹3,17,307 (approximately)

Now, consider how the 50% wage rule changes this outcome. Previously, if this employee’s Basic + DA made up only 30% of their CTC, their gratuity base would have been much lower. Under the new rule, since Basic + DA must equal at least 50% of CTC, the wage component used in this formula effectively rises, which means the same employee likely receives a noticeably higher payout than they would have under the old structure.

What Counts as “Wages” for Gratuity? (The 50% CTC Rule)

Here’s the most common mistake HR teams make: including HRA or special allowances directly in the gratuity calculation. Only Basic and DA enter the formula. However, if a company structures salaries so that Basic + DA falls below 50% of CTC, the law automatically reclassifies the excess allowance amount as wages for gratuity purposes, effectively raising the calculation base anyway.

Maximum Gratuity Limit & Tax Exemption

The maximum gratuity payable under the Act remains capped at ₹20 lakh, and this same figure also serves as the tax-exempt limit under Section 10(10) for private sector employees. Government employees, by contrast, receive full tax exemption on their gratuity without this ceiling.

Since gratuity represents income earned over several years but received as a single lump sum, the Income-tax Rules, 2026 introduce a structured relief mechanism under Section 157. Instead of taxing the entire amount in the year you receive it, this provision spreads the tax impact across the years the income actually accrued, which prevents you from getting pushed into a much higher tax bracket simply because of one large payout. If your gratuity pushes you into a higher slab in the receipt year, this relief meaningfully reduces the extra tax burden — though the benefit is limited if your applicable tax rates didn’t vary much across those years. For a deeper understanding of how these rates work, our Income Tax Slabs 2026-27 guide breaks down both regimes with examples.

When Can Gratuity Be Forfeited?

An employer cannot withhold your gratuity simply because you resigned or joined a competitor. The law permits forfeiture only under specific circumstances:

• Termination for riotous or disorderly conduct: Involvement in violence or serious workplace disorder.
• Moral turpitude: Acts involving grave ethical or criminal violations during employment.
• Wilful property damage: If you caused deliberate damage to company property, the employer can deduct the actual repair cost from your gratuity, but must still pay the remaining balance.

How to Claim Gratuity: Step-by-Step

• Submit Form I to your employer once you become eligible, ideally within 30 days of your last working day.
• Your employer must calculate and communicate the gratuity amount promptly after receiving your application.
• Under Section 7 of the Act, the employer must pay the amount within 30 days from the date it becomes payable.
• If payment gets delayed beyond 30 days, the employer must pay simple interest on the outstanding amount.

When calculating your last drawn wages for this claim, cross-check the figures against your final salary slip, since discrepancies here are one of the most common sources of gratuity calculation disputes.

Gratuity for Government vs Private Sector Employees

What Should You Do Now?

For Employees

• Check whether your Basic + DA meets the 50% CTC threshold, since this directly affects your gratuity payout.
• If you’re on a fixed-term contract, confirm your eligibility under the new 1-year rule before your contract ends.
• Keep your nomination form updated, particularly relevant for the death/disablement exception.

It’s also worth reviewing how gratuity interacts with your annual tax documents — our Form 16 guide and TDS on Salary explainer cover how these lump-sum benefits show up in your overall tax picture.

For Employers

• Audit current CTC structures to confirm Basic + DA meets the 50% floor.
• Update payroll systems to correctly identify and pay fixed-term employees under the new 1-year rule.
• Revise gratuity provisioning in financial statements to reflect the higher wage base.

Frequently Asked Questions

Conclusion

Gratuity has never been a favour from your employer — it’s a legal right, and the Gratuity Rules 2026 update makes that right stronger and more inclusive than ever. Contract and fixed-term employees finally get a fair shot at this benefit after just one year, and the 50% wage rule ensures long-serving employees receive a payout that genuinely reflects their years of service, rather than one shrunk by artificially low basic salaries. Before your next resignation, retirement, or contract completion, pull out your salary slip, apply the formula, and confirm your employer calculated your gratuity correctly. The law stands firmly on your side — the only question is whether you’re using it.

For gratuity official rules and the complete text of the Act, you can refer to the Chief Labour Commissioner’s official gratuity page.