# Gratuity

> Gratuity is a lump sum an employer pays on an employee's exit, retirement, death or disablement: 15 days' wages for each completed year of service, up to ₹20 lakh. It needs five years of service, or one year for fixed-term employees under the labour codes.

In EaseDesk (coming soon, not available yet): Gratuity provisions and final settlement are coming to EaseDesk with payroll and HR, worked out from each employee's wages and years of service.

## 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.

## Questions

### How is gratuity calculated?

Last drawn wages multiplied by 15, divided by 26, multiplied by the years of service. A part year of more than six months counts as a full year. Wages here mean basic pay, dearness allowance and retaining allowance, plus any excess of other allowances over half of total pay.

### Who is eligible for gratuity?

Employees of establishments with 10 or more employees who complete five years of continuous service. Five years is not needed on death or disablement, or for fixed-term employees, who become eligible after one year of service under their contract.

### What is the maximum gratuity?

₹20 lakh, the ceiling notified by the central government. An employer may pay more under a contract or agreement.

### Is gratuity taxable?

For non-government employees it is tax-free up to ₹20 lakh over their working life. Any amount above that is taxed as salary.

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Source: https://www.easedesk.com/glossary/gratuity · Updated 2026-09-28 · EaseDesk