New Gratuity Rules 2026: Eligibility Criteria, 15/26 Formula & ₹20L Cap

The Payment of Gratuity Act, 1972 covers every factory, mine, plantation, port, and shop employing 10 or more workers on any day in the preceding 12 months. Once triggered, the Act stays in force even if headcount later drops below 10 — a detail that catches many employers off guard (Ministry of Labour & Employment, Payment of Gratuity Act, Sec. 1(3)).

Gratuity is a statutory retirement benefit — a lump sum paid by the employer as recognition for long service. It's payable when an employee leaves after 5 years of continuous service, whether through resignation, retirement, superannuation, death, or disablement.

Under the Payment of Gratuity Act, 1972, gratuity is a statutory benefit payable to employees on resignation, retirement, death, or disablement after completing 5 years of continuous service. The Act covers all private and MNC establishments with 10 or more employees, and coverage persists even if headcount later falls below 10 (Payment of Gratuity Act, 1972, Sec. 1(3)).

The single most common calculation error is using 30 days instead of 26. The Act mandates 26 working days in a month — not 30. On ₹60,000/month Basic+DA with 10 years of service, the correct gratuity is ₹3,46,154. Using 30 days gives ₹3,00,000 — a difference of ₹46,000, or more than 13% less than what you're legally owed.

For monthly-rated employees covered under the Act:

Where:

• Last Drawn Wages = Basic Salary + Dearness Allowance (DA) — not total CTC
• 26 = Working days in a month as per the Act
• 15 = Days' wages per completed year of service
• Years of Service = Completed years; service exceeding 6 months in the final year rounds up to the next full year

Worked Example: ₹60,000/month, 10 Years

Gratuity Amounts at Different Salary & Tenure Levels

All calculations use the standard 15/26 formula. Values rounded to the nearest rupee.

For Piece-Rated Employees

Gratuity = Average of total wages earned in the last 3 months ÷ total days worked × 15 × years of service. Overtime wages are excluded from this calculation.

For Seasonal Employees

Gratuity = 7 days' wages for each season worked. A "season" means the period the establishment normally operates in a year.

The Payment of Gratuity Act mandates 26 working days — not 30 — as the monthly divisor. On ₹60,000/month Basic+DA over 10 years, this yields ₹3,46,154. Using 30 days would understate the payout by ₹46,154 (13.3%). Only Basic + DA counts as wages; HRA, allowances, and bonuses are excluded (Payment of Gratuity Act, 1972, Sec. 4(2)).

The 5-year continuous service rule is the standard gateway — but "continuous" doesn't mean uninterrupted. Courts have consistently ruled that authorised absences, medical leave, and lay-off periods count toward continuous service, as long as the employee works at least 240 days in the preceding 12 months (Payment of Gratuity Act, 1972, Sec. 2A). Most salaried employees who've been with one employer for 5 years will qualify.

When Is the 5-Year Rule Waived?

• Death: If the employee dies during service, gratuity is payable to the nominee or legal heirs regardless of service length — even on day one.
• Disablement: If the employee becomes disabled due to disease or accident, they're entitled to gratuity even with less than 5 years of service.

What Counts as "Continuous Service"?

An employee is deemed to have continuous service if they have worked:

• 240 days in the preceding 12 months (for non-seasonal workers in above-ground roles)
• 190 days for employees in mines or establishments with a 6-day work week

Rounding Rule for Service Years

If service in the final year exceeds 6 months, it rounds up. Exactly 6 months does not round up — only "more than 6 months" triggers rounding. This matters. 4 years and 6 months? You don't qualify. 4 years and 7 months? You do.

• 4 years 6 months = 4 years (does NOT round up — not eligible)
• 4 years 7 months = 5 years (rounds up — eligible)

Gratuity eligibility in 2026 requires 5 years of continuous service, defined as working 240 days in the preceding 12 months for above-ground, non-seasonal employees. The 5-year threshold is waived entirely for death and disablement. Service exceeding 6 months in the final year rounds up — exactly 6 months does not (Payment of Gratuity Act, 1972, Sec. 2A & Sec. 4(1)).

Yes — and this surprises many IT professionals. India's IT sector employs over 50 lakh workers (NASSCOM, 2024), and every one of them at a company with 10+ employees is subject to the exact same Payment of Gratuity Act as any factory worker. The 15/26 formula, the ₹20L cap, the 5-year rule — none of it changes based on company type or whether your employer is Indian or foreign.

What does differ is how MNCs structure their CTC. Many IT companies keep Basic salary deliberately low (sometimes 30–35% of CTC) to reduce provident fund and gratuity liability. Since only Basic + DA counts for gratuity calculation, a lower Basic directly reduces your payout. Worth checking your offer letter.

• Formula remains the same: (Last drawn wages ÷ 26) × 15 × completed years of service.
• Eligibility remains the same: 5 years of continuous service except death/disablement cases.
• CTC structure matters: Only Basic + DA is used for gratuity — not HRA, LTA, bonuses, or other allowances.

MNC and IT employers in India with 10 or more employees are fully subject to the Payment of Gratuity Act, 1972 — the same statute that covers factories and plantations. The 15/26 formula and 5-year eligibility rule apply without exception. However, gratuity is calculated on Basic + DA only, so a low Basic salary in a high-CTC MNC package can significantly reduce the actual payout.

The ₹20 lakh tax-free ceiling under Section 10(10) of the Income Tax Act was last revised in 2018 — doubled from ₹10 lakh via the Payment of Gratuity (Amendment) Act, 2018. An employer can pay gratuity exceeding ₹20 lakh, but anything above the cap is added to taxable salary income in the year of receipt.

• Government employees: Gratuity is fully exempt from income tax — no cap applies.
• Private sector employees covered under the Act: Exempt up to ₹20 lakh. Excess is taxable at applicable slab rate.
• Employees not covered under the Act: The exempt amount is the least of: (a) ₹20 lakh, (b) half month's salary × completed years, or (c) actual gratuity received.

The government may revise the ₹20L ceiling under the new labour codes — watch for notifications from the Ministry of Labour.

Gratuity taxation in 2026 depends on which of three categories you fall into under Section 10(10) of the Income Tax Act. Government employees get full exemption. Private sector employees covered by the Act are exempt up to ₹20 lakh. Everyone else gets the least of three limits — whichever is lowest.

• Government employees: Gratuity is generally fully exempt from tax.
• Non-government employees covered by the Act: Exempt up to ₹20 lakh under Section 10(10)(ii).
• Amount above exemption limit: Taxable as salary income in the year of receipt at your applicable slab rate.

For a detailed taxable vs. exempt breakup with worked examples, see our gratuity tax exemption guide.

The Code on Social Security, 2020 — passed by Parliament but not yet notified into force — proposes two changes that will materially affect how gratuity is calculated and who gets it. The government needs to issue a "commencement notification" before these take effect; as of March 2026, no such date has been set.

• Fixed-term employees: Employees on fixed-term contracts of 1 year or more become eligible for gratuity proportionately, eliminating the 5-year service requirement for contract workers entirely.
• Wage definition tightened: "Wages" for gratuity will mean at least 50% of total remuneration. If excluded components exceed 50% of total pay, the excess is added back to the wage base — this directly counters the practice of keeping Basic salary artificially low.
• Gig and platform workers: The Code extends social security coverage to gig workers, though gratuity-specific provisions for this category are still being finalised.

The Code on Social Security, 2020 proposes that fixed-term employees become eligible for proportionate gratuity after completing just 1 year of service — removing the current 5-year barrier entirely for contract workers. The wage definition also shifts to require at least 50% of total remuneration to count as 'wages', reducing CTC-structuring strategies that suppress the gratuity base (Code on Social Security, 2020, Sec. 53).