Gratuity

Why it matters to your business

Gratuity is a growing liability that sits quietly in your books until an employee leaves. The labour codes, in force from 21-11-2025, increased it for many businesses: wages now include any allowances above half of total pay, and fixed-term employees qualify after one year. Providing for it every year, and paying it on time at exit, keeps it from becoming a surprise.

How it works

As of September 2026:

• Coverage: establishments with 10 or more employees. Once covered, they stay covered.
• When it is paid: on resignation, retirement, termination, death or disablement, and on the end of a fixed-term contract.
• Service: five years of continuous service, except on death or disablement and for fixed-term employees (one year).
• Amount: 15 days’ wages for each completed year, at the last drawn rate, up to ₹20 lakh. Seasonal employees get 7 days’ wages for each season.
• Wages: the labour codes’ definition applies from 21-11-2025, and gratuity for employees leaving after that date is paid on the last drawn wages under the Code on Social Security, 2020.
• Timing: within 30 days of it becoming payable, with interest if paid late.

An example

An employee leaves after 7 years and 4 months, with last drawn wages of ₹30,000 a month. The four months are less than six, so service counts as 7 years.

Gratuity = ₹30,000 × 15 ÷ 26 × 7 = ₹1,21,154.

A fixed-term employee with wages of ₹26,000 whose one-year contract ends receives ₹26,000 × 15 ÷ 26 × 1 = ₹15,000.

Common mistakes

• Calculating on basic pay alone when allowances exceed half of total pay.
• Refusing gratuity to fixed-term employees who have completed one year.
• Not providing for gratuity in the accounts each year, so a senior employee’s exit strains cash.