How to Calculate Your Gratuity: the Formula Is in the Law, the Ceiling Is Not

The formula for your gratuity is written into the law. The ceiling on it is not.

That sounds like a small distinction. It is the reason guidance on this subject is so inconsistent. Almost every calculator online tells you the maximum is ₹20 lakh and implies the statute says so. Open the statute and the number is not there.

This guide works through the actual calculation, step by step, from the text of the law that governs it today. Where the law leaves something open, it says so instead of filling the gap with a figure.

Which law applies to you now

Gratuity used to sit in the Payment of Gratuity Act, 1972. It now sits in Chapter V of the Code on Social Security, 2020, which came into force on 21 November 2025 along with the other labour codes.

The rules carried across largely intact. What changed is the definition of wages, and that change matters more to your final number than anything else in the chapter.

One group is carved out entirely. Explanation 1 to section 53 says the chapter does not cover anyone holding a post under the Central or a State Government who is governed by separate gratuity rules. Government employees have their own regime with its own limits.

The formula, straight from the Act

Section 53(2) sets the rate. For every completed year of service, you get fifteen days of wages, based on the rate of wages you last drew.

Explanation 3 then tells you exactly how to turn a monthly salary into fifteen days of it:

in the case of a monthly rated employee, the fifteen days’ wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.

So the sum is:

Gratuity = (last drawn monthly wages ÷ 26) × 15 × completed years of service

One detail in section 53(2) is easy to miss. It says fifteen days’ wages “or such number of days as may be notified by the Central Government”. The fifteen is a default that can be changed by notification without touching the Code. It has not been changed so far.

Why 26 and not 30

You will read that the 26 comes from a month of 30 days minus four Sundays, or from a six-day working week. Those are reasonable guesses and neither is the reason.

The reason is that the statute says 26. Explanation 3 prescribes the divisor directly. There is no working-days calculation to argue about and no version of the sum where 30 is correct for a monthly rated employee.

It works in your favour, incidentally. Dividing by 26 instead of 30 makes your daily wage about 15% higher, and every year of gratuity with it.

What counts as “wages”

This is where most people get the wrong answer. They put their full salary into the formula. The law means something narrower, and then widens it again through a back door.

Section 2(88) defines wages as all remuneration, and specifically includes three things:

• basic pay
• dearness allowance
• retaining allowance, if any

It then excludes a long list: bonus, the value of housing or light or water or medical attendance, the employer’s provident fund or pension contribution, conveyance allowance, sums to cover special expenses of the job, house rent allowance, remuneration under an award or settlement, overtime, commission, gratuity itself, and retrenchment compensation or other retirement benefits.

Read that list and you can see the obvious move an employer could make. Keep basic pay low, push everything into allowances, and the gratuity base stays small.

The proviso to section 2(88) closes that door. If the excluded payments come to more than half of your total remuneration, the excess is added back into wages. In practice your wages for this calculation can never be less than half your total pay.

That floor is why gratuity cheques under the codes are larger than they used to be, and it is the same mechanism that reshaped salary structures generally. What it does to the monthly amount in your hand is a separate question, and not always a happy one.

What the number actually comes to

Here is the formula applied at a range of salaries. Wages here means the gratuity base, not your full CTC.

Notice the last row. At ₹2 lakh of monthly wages and 20 years, the formula produces ₹23.08 lakh and you receive ₹20 lakh. Everything above the ceiling is cut off, unless your employer has agreed to pay more.

That last point is real, not theoretical. Section 53(5) says nothing in the section affects your right to better terms under an award, an agreement or a contract with your employer. The ceiling caps what the law compels. It does not cap what a contract can promise.

The rounding rule, stated precisely

Section 53(2) covers every completed year of service “or part thereof in excess of six months”.

Read those last four words carefully. A part year counts as a full year only if it is longer than six months. Exactly six months is not in excess of six months.

At ₹60,000 of monthly wages, the difference looks like this:

• 7 years 5 months counts as 7 years, and pays ₹2,42,308
• 7 years 6 months still counts as 7 years, and pays ₹2,42,308
• 7 years 7 months counts as 8 years, and pays ₹2,76,923

Most online calculators round up at six months or more. At that exact boundary they will tell you a number about ₹35,000 too high. If your leaving date is anywhere near a six-month mark, a few days either side are worth real money.

Five years, and the 240 days inside it

Section 53(1) requires five years of continuous service before gratuity is payable. The word doing the work there is continuous, and section 54 defines it in a way that is more generous than most people expect.

Service still counts as uninterrupted through sickness, accident, leave, lay-off, a strike, a lock-out, or work stopping for a reason that is not your fault. Even absence without leave counts, unless your employer has formally treated it as a break under the standing orders.

If your service does not meet that test, section 54(B) gives a second route. You are deemed to have a year of continuous service if, in the preceding twelve months, you actually worked at least:

• 240 days in most jobs
• 190 days if you work below ground in a mine, or in an establishment that operates fewer than six days a week

The 190-day figure is almost never mentioned anywhere, and it covers a lot of people. A five-day-week office is an establishment working fewer than six days a week.

What counts as a day actually worked is also defined, and it includes days you were not at work: days laid off, days of paid leave earned in the previous year, days absent through temporary disablement from a workplace accident, and maternity leave of up to 26 weeks.

For seasonal establishments the test is different again. Section 54(C) asks whether you worked at least 75% of the days the establishment was actually operating.

When five years is not required

The second proviso to section 53(1) removes the five-year requirement in four situations: death, disablement, the expiry of a fixed term contract, and any other event the Central Government notifies.

Fixed-term employment is the one that changed the most. A fixed-term employee earns gratuity on the expiry of the term, and the third proviso to section 53(2) says it is paid pro rata. No five-year wait.

There is also a group with a shorter clock written into the statute. The first proviso to section 53(1) says that for a working journalist, as defined in the Working Journalists Act, 1955, the words “five years” are to be read as three years.

On death, the money goes to your nominee, or to your heirs if you never named one. Where an heir is a minor, their share is deposited with a competent authority and invested until they reach adulthood rather than handed to a guardian. That is the third proviso to section 53(1), and it sits alongside the separate set of rules governing your provident fund when you leave.

Four situations with their own formula

The standard sum assumes a monthly salary and a normal job. The statute carries separate rules for people who do not fit that.

The ceiling nobody can point to

Here is section 53(3) in full:

The amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government.

That is the whole sub-section. There is no figure in it.

The ₹20 lakh everyone quotes comes from S.O. 1420(E), notified on 29 March 2018 under the Payment of Gratuity Act, 1972, which the Code has since repealed. We could not find a fresh notification issued under section 53(3) of the Code that restates it.

In practice ₹20 lakh is the operative number. The Labour Ministry confirmed as much in an August 2026 reply to bank employees asking for the limit to be raised to ₹25 lakh, saying the current maximum is ₹20 lakh and pointing them at section 53(5) and the option of a better contractual term.

Worth knowing anyway, for two reasons. A ceiling fixed by notification can be moved without amending the Code, so this is a figure to check rather than assume. And if you are anywhere near it, section 53(5) is the provision to raise with your employer, because a contract can exceed what the notification compels.

Central government employees sit outside all of this under their own rules, where the ceiling has been reported as ₹25 lakh since January 2024. We have not verified that against a primary source, and it does not affect private sector employees either way.

What you keep after tax

Gratuity is not automatically tax free. Section 10(10) of the Income-tax Act exempts the least of three amounts:

• the amount the statutory formula produces
• ₹20 lakh
• the gratuity you actually received

For most people all three are the same number and the whole thing is exempt. The exemption bites when an employer pays more than the formula requires, which happens under section 53(5) contracts. Pay ₹25 lakh against a formula amount of ₹23 lakh and the exempt figure is the lowest of the three, which is ₹20 lakh. The rest is taxable.

The ₹20 lakh tax limit traces to CBDT Notification No. 16/2019, S.O. 1213(E) of 8 March 2019. It happens to match the statutory ceiling, but they are two separate limits set by two separate authorities, and they could move apart.

When it can be taken away

Gratuity is not unconditional, and section 53(6) is the part almost no calculator mentions.

If your employment ends because of an act, wilful omission or negligence that damaged, destroyed or caused loss to the employer’s property, your gratuity is forfeited to the extent of that loss. Not entirely. The forfeiture is measured against the damage.

Gratuity can be forfeited wholly or partly in two further cases: if you were terminated for riotous or disorderly conduct or any act of violence, or for an offence involving moral turpitude committed in the course of your employment.

Note what is not on that list. Poor performance is not there. Resigning without notice is not there. Joining a competitor is not there. The grounds are narrow and specific, and an employer withholding gratuity for anything outside them is on weak ground.

Checking your own number

The calculation itself is not hard. What makes gratuity confusing is that three different numbers, the formula, the ceiling and the tax exemption, all happen to involve ₹20 lakh, and they come from three different places. Two of them are not in the Code at all.