Gratuity: eligibility, formula and changes under the Code
Gratuity is a lump sum an employer pays when an employee leaves after continuous service. Fixed-term staff qualify after one year under the Code.
Short answer
Gratuity is a lump-sum payment an employer makes to an employee on leaving, retirement, death or disablement, as a reward for continuous service. It was governed by the Payment of Gratuity Act, 1972 and, since 21 November 2025, by the Code on Social Security, 2020. Permanent employees qualify after five years of continuous service, and fixed-term employees after one year.
- Law
- Code on Social Security, 2020 (from 21 November 2025)
- Applies to
- Establishments with 10 or more employees
- Eligibility
- 5 years (permanent); 1 year (fixed-term)
- Formula
- 15 days' wages per completed year (wages ÷ 26 × 15)
How gratuity is calculated
For each completed year of service, the employee gets 15 days' wages based on the last drawn wages. The usual formula is last drawn wages multiplied by 15 and by years of service, divided by 26. For example, an employee with last drawn wages of ₹50,000 and six years of service would get ₹50,000 × 15 × 6 ÷ 26, about ₹1.73 lakh. No minimum service is required where employment ends because of death or disablement.
What changed under the Code
The Code extended gratuity to fixed-term employees on a pro-rata basis after one year of continuous service, instead of five. It also introduced a uniform definition of wages, under which excluded allowances above 50% of total remuneration are added back, which tends to increase the wage base for gratuity. Under the central rules, nominations are made within 90 days of completing one year of service, and gratuity is paid within 30 days of the application.
Under the old Act, the ceiling on gratuity was ₹20 lakh, which was also the income-tax exemption limit for private sector employees; check the current notified ceiling under the Code.
Why it matters for startups
Gratuity is a long-term liability that grows with headcount and tenure, and accounting standards require it to be provided for, often based on actuarial valuation. Review salary structures under the new wage definition, update fixed-term contracts and consider a group gratuity policy to fund the liability.
Related services
Sources
- Patron Accounting: Gratuity under the Code on Social Security (2026)
- Employees' Provident Fund Organisation
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is gratuity payable after four years and eight months?
Courts and practice have treated close to five years differently, so the answer depends on the facts. Under the Code, fixed-term employees qualify after one year.
Do startups with fewer than 10 employees pay gratuity?
Statutory gratuity applies once the establishment has 10 or more employees. Below that, it applies only if the contract provides for it.
Is gratuity taxable?
Gratuity received by private sector employees is exempt from income tax up to a specified limit, with any excess taxable as salary.