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Gratuity calculation and payment (Code on Social Security, earlier Payment of Gratuity Act)

  • Gratuity is the lump sum an employer owes when you leave after enough service.
  • Deadline: Employer must determine gratuity, give written notice and pay within 30 days of it becoming payable
  • Done in 2 working days after service and salary details
  • Prepared by your Savvy, checked by a CA
  1. Appointment letter and joining date
  2. Is the establishment covered for gratuity
  3. Check eligibility and count completed years of service
  4. Gratuity computation sheet
The law and the stepsPay and start · ₹999On exit, + 18% GST

Answer in brief

Gratuity is the lump sum an employer owes when you leave after enough service. We check eligibility under the new labour code, compute it with the 15/26 formula on the correct wages, tell you the tax-free part, and help the employer issue the notice and pay within 30 days.

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From the official sources

What the law says, and what trips people up

From the official portal's manuals and FAQs, with the source for each point.

The law

  • Code on Social Security 2020, Sections 17 to 141 in force 21 November 2025 (S.O. 5319(E)); Payment of Gratuity Act 1972 repealed subject to savings

    Gratuity now sits in Chapter V of the Code; the formula is unchangedSource

  • Code on Social Security 2020, Section 53(1)

    Payable on leaving after at least 5 years of continuous service; 5 years not needed on death, disablement, expiry of a fixed-term contract or a notified eventSource

  • Code on Social Security 2020, Section 53(2) and Explanation

    15 days' wages for each completed year or part over six months, at the last wage drawn; for monthly-rated staff, monthly wage divided by 26 times 15; pro rata for fixed-term and deceased employees; seasonal at 7 days a seasonSource

  • Code on Social Security 2020, Section 53(3), (5) and (6)

    Amount capped at the limit the Central Government notifies; better contract terms preserved; forfeiture for wilful damage or misconduct on terminationSource

  • Code on Social Security 2020, Section 2(88)

    Wages are basic, DA and retaining allowance, with excluded items above half of total remuneration added backSource

  • Code on Social Security 2020, Section 55

    Employee with one year of service nominates family members; employer keeps nominations safeSource

  • Code on Social Security 2020, Section 56

    Employer determines the amount, gives written notice to the payee and the competent authority, pays within 30 days; late payment carries simple interest at the notified rate; disputed amounts deposited with the competent authority; appeal within 60 daysSource

  • Social Security (Central) Rules 2026, notified 8 May 2026

    Fixed-term employees entitled on contract expiry after at least one year of service; gratuity computed on the Code's wage definitionSource

  • Income-tax Act 1961, Sec 10(10) (now Sec 19); Income-tax Act 2025 from tax year 2026-27

    Private employees: least of actual gratuity, formula amount or ₹20 lakh is exempt, a lifetime cap; renumbered under the 2025 Act with the substance unchangedSource

  • Government fee

    None. Gratuity is paid by the employer; no government fee applies. Tax-free limit for private employees: ₹20 lakh lifetime (CBDT Notification 16/2019 for exits from 29 March 2018). Source: https://taxgarden.in/blog/gratuity-calculation-tax-exemption-employer-guide-india-2026

  • Late fee or penalty

    Simple interest from the due date to payment at the rate the Central Government notifies for long-term deposits (Sec 56): https://taxclue.in/blog/section-55-56-social-security-code-2020-nomination-and-determination-of-gratuity/ . A practitioner reads the 12% Sec 127 notification (S.O. 2698(E)) as covering gratuity too: https://www.sgcms.com/regulatory-updates/3380-2/

On the portal

  1. No single government portal: gratuity is computed and paid by the employer
  2. Collect service dates, exit reason and salary breakup
  3. Apply the 15/26 formula on Code wages; check fixed-term and ceiling rules
  4. Issue the written notice of amount to the employee and the competent authority
  5. Pay within 30 days; show the exempt and taxable parts in payroll and Form 16
  6. If unpaid or disputed, the employee applies to the competent authority (state labour department)

What trips people up

  • Employer computes gratuity on basic only although allowances exceed half of pay

    Apply the Code's wage definition, adding back excluded items above 50% of remunerationSource

  • Employee with 4 years and some months is refused gratuity

    A Madras High Court ruling treats 4 years and 240 days as five years; check factsSource

  • Fixed-term staff told they get nothing before five years

    Fixed-term employees are entitled pro rata after one year of serviceSource

  • Tax exemption claimed again in full at a second employer

    ₹20 lakh is a lifetime cap; reduce by exemption used earlierSource

  • Employer books a provision but claims a tax deduction before paying

    Sec 40A(7) allows deduction only on payment or contribution to an approved fundSource

People ask

Has the gratuity formula changed under the new labour code?

No. It is still 15 days' wages for each completed year, with more than six months rounded up. What changed is the wage definition and the one-year rule for fixed-term staff.Source

Why divide by 26?

For monthly-rated employees, 15 days' wages is the monthly rate divided by 26 and multiplied by 15.Source

How much gratuity is tax-free?

For private employees, the least of actual gratuity, the formula amount and ₹20 lakh, as a lifetime cap. Government employees are fully exempt.Source

When must the employer pay?

Within 30 days of the date gratuity becomes payable, with interest if late.Source

Can gratuity be withheld?

Only to the extent of damage caused by a wilful act on termination, or wholly or partly for riotous conduct, violence or an offence of moral turpitude.Source

What if the employee dies before five years?

The five-year rule does not apply; gratuity is paid pro rata to the nominee or heirs.Source

IDFD

How we solve it: 4 steps

Every line tracked live.

Step 1 of 4 · What we need from you

Tap each one you already have

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  • Appointment letter and joining date
  • Exit date and reason
  • Last drawn salary breakup
  • Fixed-term contract, if anyOptional
  • Gratuity nomination formOptional
  • Gratuity received from past employersOptional
  • Company gratuity policy or trust rulesOptional

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₹999 + ₹179.82 GST = ₹1,178.82

On exit. Delivered in 2 working days after service and salary details. Due: Employer must determine gratuity, give written notice and pay within 30 days of it becoming payable

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