What gratuity is
Gratuity is a lump sum an employer pays in recognition of long service, usually when employment ends after a qualifying period. It is separate from your monthly salary and from provident fund savings such as EPF.
Statutory gratuity was earlier governed by the Payment of Gratuity Act, 1972. The Code on Social Security, 2020 took effect on 21 November 2025 and consolidates that law, so it is now the governing statutory framework. Some employers also pay gratuity under their own scheme, which may be more generous. The framework that applies to you changes the formula, so start by confirming it with HR or your appointment letter.
The salary used in the formula
The statutory calculation uses your last drawn monthly "wages" as legally defined, not automatically just basic pay plus dearness allowance (DA). Under the Labour Codes, wages broadly include basic pay, DA and retaining allowance, and exclude items such as HRA, conveyance, overtime, bonuses and certain other allowances — but if the excluded items exceed a set share of total pay (50% under the Codes), the excess is added back to wages. This add-back rule can make the gratuity wage base higher than basic plus DA.
This matters because basic pay is often a fraction of CTC. If you want to see how basic pay sits inside your package, the CTC to In-Hand Salary Calculator breaks it down. What exactly counts as salary for gratuity can depend on your employer's terms and the applicable law, so treat basic plus DA as a simplified starting point. CalPaisa's calculator takes only basic and DA as inputs and does not apply the add-back rule, so its statutory figure is an estimate.
How years of service are counted
Gratuity is calculated per year of service with the employer. The general condition is five years of continuous service, with exceptions — for example, the condition does not apply when employment ends because of death or disablement.
Under the Code on Social Security, eligible fixed-term employees — people engaged directly by the employer on a fixed-term contract — qualify for gratuity after one year of service under their contract. This does not mean every contract worker qualifies after one year: contract labour engaged through a contractor is a different category, and their entitlement depends on their own employment terms and the applicable rules.
For the statutory option, CalPaisa's calculator rounds the service up to the next full year when the extra part-year is six months or more, and down otherwise. So 7 years 8 months counts as 8 years, while 7 years 4 months counts as 7. For the employer-scheme option, the calculator uses completed years only.
The formula CalPaisa's calculator uses
Statutory estimate: gratuity = 15 ÷ 26 × last drawn monthly wages × counted years. The 15 represents 15 days' wages per year, and 26 is the number of working days assumed in a month. The calculator uses basic + DA as a simplified stand-in for wages.
Illustrative employer scheme: gratuity = 15 ÷ 30 × monthly salary × completed years. This is a common alternative assumption for employment outside the statutory framework, not a legal rule — your employer's own scheme may differ or be more generous.
For the statutory option the calculator caps the result at ₹20,00,000. This is the calculator's configured limit, not a guaranteed maximum for every person; verify the limit and rules that apply to you, since limits can be revised and employer schemes can differ.
| Assumption | Statutory estimate | Illustrative employer scheme |
|---|---|---|
| Formula | 15 ÷ 26 × salary × years | 15 ÷ 30 × salary × years |
| Part-year of 6+ months | Rounded up to a full year | Ignored |
| Limit in the calculator | ₹20,00,000 configured limit | None modelled |
| Salary base | Basic + DA (simplified; legal wages may be higher) | Basic + DA |
A worked example
Hypothetical example: your last drawn basic pay is ₹40,000 a month, with no DA, and you leave after 7 years and 8 months. For simplicity, assume ₹40,000 is also your wage base — in practice, the add-back rule could make legal wages higher.
Statutory estimate: the service counts as 8 years. Gratuity = 15 ÷ 26 × ₹40,000 × 8 ≈ ₹1,84,615.
Other-scheme assumption: only 7 completed years count. Gratuity = 15 ÷ 30 × ₹40,000 × 7 = ₹1,40,000.
The same person gets two quite different figures depending on the framework and rounding. These are illustrative estimates, not a statement of what any employer owes.
Enter your own basic pay, DA and service to see the salary used, counted years and estimate under either framework.Open the Gratuity CalculatorHow to use the Gratuity Calculator
The calculator shows its working, so you can check each step against your employer's figure.
- Enter your last drawn monthly basic salary, not CTC or gross pay.
- Add monthly DA only if it is part of your salary structure.
- Enter years of service as a decimal for part years, such as 7.67 for 7 years 8 months.
- Choose the statutory estimate or the employer-scheme illustration, based on what your employer confirms.
- Read the counted service and salary used alongside the estimate.
Common mistakes
Most differences between an estimate and the actual payout come from these points.
- Using CTC or gross salary instead of the legal wage base — or assuming basic plus DA is always the full wage base.
- Assuming every employer uses the same formula.
- Forgetting the six-month rounding rule, or applying it to a scheme that does not use it.
- Assuming eligibility automatically — continuity of service and the reason you leave can matter.
- Treating the estimate as the final payout or assuming a tax outcome without checking.
Conclusion
Gratuity is driven by two numbers: your last drawn wages as legally defined, and your counted years of service. Getting both right — and knowing which framework applies — explains most of the result. Gratuity sits alongside your EPF savings in your long-term picture; the EPF Calculator projects that side. Confirm eligibility and the final figure with your employer.