What is Gratuity?
From 21 November 2025, gratuity is governed by the commenced labour-code framework, including the Code on Social Security, 2020 and applicable rules. Five years of continuous service remains the ordinary condition for superannuation, retirement or resignation, but it is not required for death, disablement, or expiry of qualifying fixed-term employment. A fixed-term employee becomes eligible on a pro-rata basis after the statutory one-year service condition. Establishment coverage and service continuity still need to be checked.
Gratuity Calculation Formula
For a monthly-rated covered non-government employee, the common formula is: Gratuity = 15 ÷ 26 × last drawn statutory wages × completed years of service Government gratuity and other employment cases require separate rules. A part-year is counted only when it is in excess of six months; exactly six months is not automatically rounded upward. “Wages” is the statutory labour-code amount, not simply whatever a payslip labels basic salary. Included and excluded remuneration and the 50% remuneration rule can alter the wage base. Fixed-term and seasonal cases can require a different pro-rata application.
Income-Tax Exemption on Gratuity
Income-tax exemption depends on government/non-government status, statutory coverage, actual gratuity, the notified lifetime ceiling, and the tax formula. For a covered non-government employee, the exempt amount is generally the least of actual gratuity, the notified ₹20,00,000 ceiling, and the statutory formula amount. The labour-law entitlement and income-tax exemption are separate calculations; an amount payable by the employer is not automatically fully tax-exempt.
Gratuity on Death or Disablement
Death or disablement removes the ordinary five-year service condition. The amount is payable to the employee or nominee/legal heir as applicable and must be calculated under the current wage and service rules. Do not apply the separate insurance-linked death-benefit table as though it were the ordinary gratuity formula. The recipient should check the current income-tax exemption provision and documentation for the payment.
Multiple Employer Gratuity
For non-government gratuity subject to the notified ceiling, prior exemption use matters: the ₹20 lakh ceiling is cumulative across relevant receipts, not a fresh limit per employer. Example, assuming both receipts fall within this non-government ceiling and the formula-based limits do not reduce exemption further: ₹12 lakh from Employer A plus ₹15 lakh from Employer B uses ₹27 lakh in total, so no more than ₹20 lakh can be exempt under the lifetime ceiling and at least ₹7 lakh remains outside that ceiling. Government gratuity follows different rules. Always disclose prior gratuity and confirm the amount actually received, formula-based limit, prior exemptions, and current provision when filing the return.
Official References
Source date: 2026-07-28. Confirm later notifications, rules and portal forms before filing or transacting.