Gratuity is a lump-sum benefit paid when an employee leaves after qualifying service, retires, or dies or is disabled. It was governed by the Payment of Gratuity Act, 1972, which is now part of the Code on Social Security, 2020, in force since 21 November 2025.
Eligibility
- Establishments: those with 10 or more employees on any day in the preceding 12 months. Once covered, they remain covered even if headcount falls.
- Permanent employees: five years of continuous service. The five-year condition does not apply on death or disablement.
- Fixed-term employees: under the Code, eligible on a pro-rata basis after one year of service.
The formula
For a covered establishment: Gratuity = last drawn wages × 15 ÷ 26 × completed years of service, where service beyond six months in the final year is commonly rounded up. "26" reflects working days in a month. The statutory ceiling is ₹20 lakh; employers may pay more by contract.
Worked example (illustrative): last drawn wages of ₹40,000 and 7 years of service → 40,000 × 15 ÷ 26 × 7 = ₹1,61,538.
What changed with the Labour Codes
- Wage definition: gratuity is computed on "wages" as defined in the Codes. If excluded allowances exceed 50% of total remuneration, the excess counts as wages — which can raise the base for structures with a low basic pay.
- Fixed-term staff: the one-year threshold above.
- Rules: some central and state rules were still being notified during 2026. Follow the Ministry of Labour & Employment for the operative rules.
Payment timing
Gratuity is payable within 30 days of becoming due; delayed payment attracts interest. Many employers fund the liability through a gratuity trust or an insurer's group gratuity scheme, and account for it actuarially.
Keep service dates clean
Every gratuity dispute starts with service dates: joining date, breaks, transfers between group entities, and the exit date. Those belong in one auditable employee record with a change history — see the employee lifecycle data model.
Sources and review date
Facts in this article were checked against the official sources below as of 8 October 2026. Rates, wage ceilings, due dates and forms change by notification, so confirm on the source before acting.
- Labour Codes page, Ministry of Labour & Employment
- Ministry of Labour & Employment (labour.gov.in)
- India Code (indiacode.nic.in) — official text of central Acts
This is a general explainer written by the Kyrospect editorial team, not legal, tax or payroll advice. Applicability depends on your state, headcount, establishment type and contracts — confirm with a qualified professional or the authority concerned.
Where Kyrospect fits: Kyrospect HRMS holds employee records and Tracking records shift hours on the same identity. It does not calculate or file PF, ESI, professional tax, TDS or gratuity today — payroll is planned and gated on statutory compliance work. See the roadmap for current status.