Gratuity Calculation Formula — 15/26, 15/30, and the Wage Base That Changed
Gratuity is last drawn wages × 15/26 × completed years of service for establishments covered under the Payment of Gratuity Act, or ×15/30 for non-covered establishments — computed on the Labour Codes' expanded statutory wage base, not basic pay alone.
The four Labour Codes came into force on 21 November 2025. Central rules are still being finalised and state rules vary — some states have notified final rules, others remain in draft. Verify the position for your state before relying on these figures.
Fixed-term gratuity vests after 1 year under the Code on Social Security, not 5.
HRA, conveyance, special allowance, overtime, etc. — needed to compute the Codes' expanded wage base.
Non-covered establishments use 15/30, not 15/26.
Years of service
7y 1m
Qualifying years
7
Final year had ≤6 months, not rounded up
Required service
5 years
Formula: Statutory wages × 15/26 × qualifying years
Calculated gratuity (uncapped)
₹2,01,923
Ceiling limit
₹20,00,000
Payable amount₹2,01,923
Tax treatment (Section 10(10))
Tax-exempt amount: ₹2,01,923
Taxable amount: ₹0
TDS applicable: No
Why this amount — the wage base matters
On the OLD basic-only base (₹50,000/month), this gratuity would have been ₹2,01,923.
This employee's excluded allowances were already within the 50% cap, so the wage base is unchanged from basic-only — no add-back applies here.
The formula, term by term
'Last drawn wages' is the statutory wage figure at the time of leaving — under the Code on Wages, this includes any add-back where excluded allowances (HRA, conveyance, special allowance, overtime, etc.) exceeded 50% of total remuneration, not just basic pay and DA. '15/26' represents 15 days of wages for each year of service, using 26 as the working-days-in-a-month convention for establishments covered under the Payment of Gratuity Act. 'Completed years of service' follows a specific rounding rule: more than 6 months in the final year rounds up to a full year; 6 months or less is disregarded.
Establishments NOT covered under the Payment of Gratuity Act use 15/30 instead of 15/26 — the same 15 days of wages per year, but divided by 30 (calendar days) rather than 26 (working days), which produces a lower figure for identical wages and tenure. Seasonal establishments use an entirely different formula: 7 days' wages for every season worked, rather than a per-year calculation.
Why the wage base is the part that actually changed
Before the Labour Codes, many payroll teams computed gratuity on basic pay plus DA alone, treating other allowances as entirely outside the formula. Under the Code on Wages, if those excluded allowances exceed 50% of total remuneration, the excess is added back into the wage base used for this exact formula — meaning the SAME tenure and the SAME CTC can now produce a HIGHER gratuity figure than the old basic-only calculation would have shown. This is the single biggest practical change to gratuity amounts under the Codes.
Frequently asked questions
Related pages
Why this matters
Gratuity disputes come down to two numbers — years of service and the wage base — and getting either wrong for one exiting employee is a liability. PracticeFlow keeps the calculation consistent across every client.
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Managing full-and-final settlements for 60 clients? PracticeFlow tracks exit dates, gratuity eligibility and settlement deadlines for every employee, across every client, in one place.
See PracticeFlow for CA FirmsEstimate for planning purposes, not legal or tax advice — always confirm with a CA/CS before finalising a settlement.