Gratuity Calculation Formula: The 15/26 Rule Explained With Examples

What gratuity is

Gratuity is a lump sum your employer pays as thanks for long service. It is paid when you retire, resign, are terminated or leave, and to your family if you die. It is separate from your salary and your EPF.

The formula, step by step

Gratuity = (15 ÷ 26) × last drawn monthly wages × years of service

1. Take your last drawn monthly wages. This is generally your basic salary plus dearness allowance, not your CTC.
2. Divide by 26 to get a day’s wage. The law treats a month as 26 working days.
3. Multiply by 15, because you get 15 days of wages for each year.
4. Multiply by your years of service.

Example: wages of ₹90,000 and 22 years. A day’s wage is ₹90,000 ÷ 26 = ₹3,462. Fifteen days is ₹51,923. Times 22 years gives ₹11,42,308. Check yours with the gratuity calculator.

Gratuity at a glance

The six-month rule

Only completed years count, with one exception: a part year of more than 6 months counts as a full year. With wages of ₹40,000, 10 years and 6 months of service gives ₹2,30,769, while 10 years and 7 months counts as 11 years and gives ₹2,53,846.

Who is eligible

• Permanent employees: 5 years of continuous service with the same employer.
• Fixed-term employees: 1 year of service under the new labour codes, which came into force on 21 November 2025. Gratuity now falls under the Code on Social Security, 2020.
• On death or disablement: no minimum period.

The formula is the same as before, but the labour codes define "wages" more widely, so the amount can be higher for some employees. Ask your HR team which wage base your employer uses.

Is gratuity taxable?

For employees covered by the gratuity law, gratuity is tax-free up to the lowest of the actual amount, the formula amount and ₹20 lakh. Anything above that is taxed as salary. Government employees follow different rules, and sources disagree on their limit, so check the current Income Tax rules. The income tax calculator shows how extra taxable income changes your tax.

The cost of leaving a few months early

Eligibility is a hard line for permanent employees. Suppose your wages are ₹50,000 and you leave after 4 years and 11 months. You are not eligible, because the 5-year condition is not met, even though 5 years would have given ₹1,44,231. If you are close to the mark and plan to move on, check your joining date and, if you can, time your resignation after the fifth anniversary. Check your appointment letter and ask HR how continuous service is counted.

Gratuity vs EPF vs leave encashment

These are three different payments. Gratuity is a one-time payment based on years of service. EPF is your own and your employer’s savings with interest, which you can claim at retirement or under the rules for earlier use. Leave encashment pays for unused leave. Do not confuse them when you work out your final settlement.

If your gratuity is delayed or refused

First ask your employer in writing, citing your joining date and last drawn wages. If it is not paid, you can approach the labour authorities under the gratuity law. Keep your appointment letter, payslips and resignation papers ready.

Common mistakes

• Using CTC instead of wages.
• Rounding 6 months up. Only more than 6 months rounds up.
• Leaving a month or two before the 5-year mark. That can cost you the whole gratuity.

Planning your retirement money? Read about the EPF interest rate and PPF vs EPF.