Gratuity Rules 2026: Eligibility, Formula & ₹20 Lakh Tax Exemption Explained

Who Is Eligible for Gratuity?

Under the Payment of Gratuity Act, 1972, an employee is eligible to receive gratuity if:

• They have completed 5 years of continuous service with the same employer (this threshold was initially 5 years and remains so — the draft Labour Code proposes 1 year for contractual workers but is not yet notified as law as of July 2026)
• The establishment employs 10 or more persons (once crossed, gratuity applicability continues even if headcount later falls below 10)
• The reason for leaving is: resignation, retirement, superannuation, death, or disablement

Exception for death / disablement: In the event of an employee’s death or total disablement, gratuity is payable regardless of the 5-year service condition.

Service year rounding: A fraction of a year of service that is more than 6 months is rounded up to the next full year for gratuity calculation. A fraction of 6 months or less is ignored. Example: 5 years and 8 months of service counts as 6 years; 5 years and 4 months counts as 5 years.

Gratuity Formula

For employees covered under the Payment of Gratuity Act (monthly-paid):

Why 15/26? 15 days’ wages for each year of service, computed using a 26-day month (one month minus 4 Sundays).

Example: An employee with last drawn basic + DA of ₹40,000/month and 12 years of completed service:

Gratuity = 40,000 × (15/26) × 12 = 40,000 × 0.5769 × 12 = ₹2,76,923

Maximum statutory gratuity: ₹20 lakh (raised from ₹10 lakh by the Payment of Gratuity (Amendment) Act, 2018, effective March 29, 2018). Any gratuity amount above ₹20 lakh paid voluntarily by the employer is still subject to income tax to the extent it exceeds the exemption.

Note: For employees not covered by the Act (e.g., in establishments with fewer than 10 employees who receive gratuity voluntarily), the formula may use a 30-day month instead of 26 — check your company policy or employment contract.

Tax Exemption on Gratuity — Section 10(10)

Under Section 10(10) of the Income Tax Act:

• Government employees: Entire gratuity received is exempt (no upper limit).
• Non-government employees covered by the Act: Exempt up to the least of:
  1. Actual gratuity received
  2. ₹20,00,000 (₹20 lakh)
  3. 15 days’ wages for each completed year of service, using the last drawn wages
• Non-government employees not covered by the Act: Exempt up to the least of:
  1. Actual gratuity received
  2. ₹20,00,000
  3. Half a month’s average salary (average of last 10 months preceding retirement/resignation) for each completed year of service

The ₹20 lakh limit is a lifetime aggregate limit across all employers. If you have already received tax-exempt gratuity from a previous employer, that amount reduces the exemption available from the current employer.

When Must Gratuity Be Paid?

The employer must pay gratuity within 30 days of the employee becoming eligible (i.e., date of resignation/retirement/death). If the employer fails to pay within 30 days without justification, they are liable to pay simple interest at the rate notified by the Central Government (currently 10% per annum) on the delayed amount.

How to Claim Gratuity

1. Form I: Employee submits Form I to the employer within 30 days of becoming eligible
2. Employer response: Employer must acknowledge receipt and issue Form L (notice of payment) within 15 days
3. Dispute: If the employer rejects or disputes the claim, file Form N with the Controlling Authority (Labour Commissioner) under the Act
4. Controlling Authority: State Labour Commissioner / Deputy Labour Commissioner depending on the state