Gratuity after 5 to 25 years of service, by salary

A number your offer letter shows but never pays

Most CTCs carry a gratuity line of 4.81% of basic. That is not a bonus. It is the employer setting aside, every year, the fifteen days' wages it will owe you when you leave, provided you stay long enough. The gratuity guide explains the five-year rule and the odd denominator. This post puts figures on it: what gratuity is worth at different salaries and lengths of service, how much of it is tax-free, and what the labour codes changed in November 2025.

The formula

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

Wages means basic plus dearness allowance, not gross pay or CTC. The 26 is the number of working days the law assumes in a month. A final part-year of more than six months counts as a full year. The statutory maximum is ₹20 lakh.

The 4.81% in your CTC is the same formula spread over twelve months: 15 ÷ 26 ÷ 12 is 4.81%. On a ₹50,000 monthly basic, the yearly provision is ₹28,860, and one year's gratuity is ₹28,846. The two match because they are the same thing.

What 5 to 25 years pay

Every cell below is computed with the formula and cap used by the gratuity calculator. Salary is the last drawn monthly basic plus DA.

Three things to read from it.

It is linear in both directions. Double the years or double the basic, and the payout doubles, until the cap. There is no compounding, which is why gratuity is a modest pot next to EPF, where the money earns interest every year. The EPF calculator shows the contrast on the same basic.

The cap arrives sooner than people expect at high salaries. On ₹2 lakh of basic, 17 years computes to ₹19,61,538 and 18 years would be ₹20,76,923, so the ₹20 lakh limit binds from year 18. On ₹1.5 lakh it binds from year 24. On ₹1 lakh it takes 35 years, and below that nobody reaches it in a normal career.

Five years is a cliff, not a ramp. A permanent employee who leaves at four years and eleven months is owed nothing; the rounding of a final part-year counts towards the amount, not towards the five-year test. Some High Courts have accepted 240 days worked in the fifth year as enough, but that is not settled law. If you are close to the line and weighing a move, the 5-year column is what you would be walking away from.

What the labour codes changed

The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972 from 21 November 2025. The formula and the ₹20 lakh cap stayed. Two rules moved, and the site's calculator applies both.

Fixed-term employees qualify after one year. A person on a fixed-term contract now earns gratuity after a single year of service instead of five. On ₹50,000 of monthly basic, one year is worth ₹28,846. For a permanent employee the five-year rule still applies, waived only on death or disablement.

Wages cannot be less than half of pay. The Code defines wages as basic plus DA, but caps the allowances left out at 50% of total remuneration. Any excess is added back. Take someone paid ₹1,00,000 a month in total, of which basic plus DA is ₹40,000. Before the Code, ten years of service paid ₹2,30,769. Under the Code, wages are lifted to ₹50,000, half of total pay, and the same ten years pay ₹2,88,462, ₹57,692 more. Low-basic structures, common in the CTC layouts of private employers, are the ones this rule changes. The Ministry of Labour and Employment publishes the Code and its rules.

How much is tax-free

For a government employee, gratuity is fully exempt. For everyone else covered by the statutory scheme, the exemption is the least of three figures:

1. the gratuity actually received;
2. the amount the statutory formula produces;
3. ₹20 lakh, a lifetime limit across all employers.

Anything above that is taxed as salary in the year you receive it. Suppose an employer pays ₹25 lakh, more than the statutory amount, to someone with ₹2 lakh of basic and 25 years of service. ₹20 lakh is exempt and ₹5 lakh is salary; if all of it falls in the 30% slab, the tax with cess is ₹1,56,000. The income tax calculator prices the exact figure. Because the ₹20 lakh limit is lifetime, a second employer's gratuity is exempt only up to whatever the first one left unused.

What to do with the lump sum

A gratuity cheque arrives when your salary stops, either between jobs or at retirement. Between jobs it often belongs in the emergency fund; the guide to emergency funds in liquid funds and the liquid fund category show where such money is usually parked. At retirement it is one pot among several, next to EPF and NPS, and the order in which you draw them is covered in retirement withdrawal order. Our comparison of EPF and NPS and the retirement calculator help size the whole picture, and investing a windfall covers the behaviour side.

What this does not tell you

The table assumes your last basic is the one shown; a promotion in your final years moves the whole payout, because the formula uses the last salary for every year of service. Employers outside the statutory scheme, or with their own more generous policy, pay differently, and the tax treatment of non-statutory gratuity differs from what is described here. Confirm your own figure with HR before planning around it. This is not tax or legal advice.