How is gratuity calculated for private sector employees?

For employees covered under the Payment of Gratuity Act: Gratuity = (15 x Last Drawn Salary x Completed Years of Service) / 26. Last Drawn Salary means Basic Pay + DA only. For non-covered employees, the divisor is 30. If service in the final year exceeds 6 months, it rounds up to the next full year. Maximum tax-free limit: Rs 20 lakh lifetime.

What is the maximum tax-free gratuity for private employees?

Rs 20 lakh over the entire working lifetime under Section 10(10)(ii) of the Income Tax Act. Any amount exceeding this is taxable as income from salary. Government employees receive fully tax-exempt gratuity with no upper limit. The Rs 20 lakh limit was last revised effective 29 March 2018.

Can an employer forfeit gratuity?

Yes, but only under Section 4(6) of the Payment of Gratuity Act. Gratuity can be forfeited wholly or partially if the employee was terminated for riotous or disorderly conduct, violence against any person, or any act constituting a moral turpitude offence. The employer must have a termination order specifying the grounds.

What is actuarial valuation for gratuity and who needs it?

Actuarial valuation is a mathematical estimate of the present value of future gratuity obligations using discount rates, salary growth, attrition, and mortality assumptions. Companies under Ind AS must carry actuarial valuations under Ind AS 19 (Employee Benefits). Companies under old GAAP follow AS 15. This is mandatory for all companies covered by these standards.

What changed for gratuity under the new Labour Code?

Social Security Code 2020 (effective 21 November 2025) introduced two major changes: (1) fixed-term employees now qualify after 1 year (previously 5), and (2) at least 50% of total remuneration must qualify as wages for gratuity calculation. Both changes significantly increase employer liabilities and may require salary restructuring.

Gratuity kaise calculate hota hai aur kitne saal baad milta hai?

Gratuity ka formula hai: (15 x Basic Salary + DA x Service ke saal) / 26. Yeh tab milta hai jab aapne ek hi employer ke saath kam se kam 5 saal ki continuous service puri ki ho. Naye Labour Code ke tahat fixed-term employees ko sirf 1 saal ke baad gratuity milegi. Maximum Rs 20 lakh tak tax-free hai. Patron Accounting - +91 945 945 6700.

What happens if the employer delays gratuity payment?

Under Section 7(3A), if gratuity is not paid within 30 days, the employer must pay simple interest at 10% p.a. from the date payable until actual payment. Persistent non-payment can result in criminal prosecution with imprisonment up to 2 years under Section 9. The Controlling Authority can order payment with interest on employee complaint. Quick Answers Q: Gratuity formula? A: (15 x Basic+DA x Years) / 26 for covered; /30 for non-covered. Q: Minimum service? A: 5 years permanent; 1 year fixed-term (new code); waived for death/disability. Q: Tax-free limit? A: Rs 20 lakh lifetime cap for private employees. Q: Payment deadline? A: 30 days from date of becoming due. Q: Interest on delay? A: 10% p.a. simple interest under Section 7(3A).

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Q: Is gratuity payable before completing 5 years of service?

For permanent employees, 5 years of continuous service is the minimum. However, this is completely waived for death or disablement. Under the Social Security Code 2020 (effective 21 November 2025), fixed-term employees qualify after just 1 year. Courts have also treated 4 years and 240 days as equivalent to 5 years in certain judgments.

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Formula: Gratuity = (15 x Last Drawn Salary x Completed Years) / 26 (covered employees). Last Drawn Salary = Basic + DA only.

Eligibility: 5 years continuous service (permanent). 1 year for fixed-term under Social Security Code 2020 (effective 21 Nov 2025). Waived for death/disablement.

Tax-Free Limit: Rs 20 lakh lifetime cap (private sector) under Section 10(10)(ii) IT Act. Government employees: fully exempt, no limit.

Payment: Employer must pay within 30 days (Section 7). Delay: 10% p.a. interest. Non-payment: imprisonment up to 2 years (Section 9).

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Patron Accounting delivered our Ind AS 19 actuarial valuation with zero audit adjustments. Their Labour Code transition assessment revealed a 35% increase in gratuity liability from fixed-term employees that we had not provisioned for. Caught it before the auditors did.

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Our previous accountant was calculating gratuity on gross salary including HRA and special allowances. Patron Accounting corrected the formula to Basic + DA only, saving us from significant overpayment. They also restructured our salary components in line with the 50% wage rule.

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Overview What Is Gratuity Who Must Comply Our Services 7-Step Process Documents Challenges Fees Timeline Benefits DIY vs Professional FAQs

Gratuity Calculation and Compliance - Guide for 2026

📌 TL;DR - Gratuity Compliance Services at a Glance

Gratuity is calculated as (15 x Last Drawn Basic + DA x Years of Service) / 26 for Act-covered employees. Eligibility: 5 years continuous service (1 year for fixed-term under new Labour Code). Maximum tax-free: Rs 20 lakh. Employer must pay within 30 days. Social Security Code 2020 effective 21 November 2025 expands eligibility and restructures wage definitions.

Gratuity is both a statutory obligation and a valuable retirement benefit. Getting the calculation wrong - using CTC instead of Basic + DA, miscounting service years, or ignoring fixed-term eligibility - exposes employers to disputes and employees to underpayment. Companies under Ind AS must carry actuarial valuations on their balance sheet, making accurate computation a financial reporting requirement, not just an HR exercise.

Parameter	Details
Formula (Covered)	(15 x Last Drawn Salary x Years) / 26
Formula (Not Covered)	(15 x Last Drawn Salary x Years) / 30
Eligibility - Permanent	5 years continuous service
Eligibility - Fixed-Term	1 year (Social Security Code 2020, w.e.f. 21 Nov 2025)
Tax-Free Limit (Private)	Rs 20 lakh lifetime cap - Section 10(10)(ii) IT Act
Payment Deadline	Within 30 days of becoming due (Section 7)
Starting Price	Rs 4,999 per engagement (Patron Accounting)

Content is reviewed quarterly for accuracy.

What Is Gratuity?

Gratuity is a lump-sum monetary benefit paid by an employer to an employee as a reward for long-term service, governed by the Payment of Gratuity Act, 1972, and now the Social Security Code, 2020.

The Act applies to every factory, mine, oilfield, plantation, port, railway company, shop, or establishment employing 10 or more persons. The amount is computed based on last drawn wages (Basic + DA) and completed years of service using the statutory 15/26 formula. It becomes payable on superannuation, retirement, resignation, death, or disablement.

Once applicable, the Act continues even if employee count drops below 10. The employer must pay within 30 days, with 10% p.a. interest on delays and imprisonment up to 2 years for non-payment (Section 9).

Key Terms for Gratuity Compliance:

Last Drawn Salary: Basic Pay + DA only. HRA, conveyance, bonus excluded. Under SSC 2020, wages must be at least 50% of total remuneration.

15/26 Formula: 15 = half a month's salary; 26 = working days (excluding Sundays). Non-covered establishments use divisor 30.

Continuous Service (Section 2A): 240 days worked in a year (190 days for 5-day week/mines/seasonal).

Actuarial Valuation: Present value estimate of future gratuity liability under Ind AS 19/AS 15. Uses discount rates, attrition, mortality tables.

Forfeiture (Section 4(6)): Gratuity may be forfeited for riotous conduct, violence, or moral turpitude offences only.

Gratuity Act, 1972 15/26 Formula | Rs 20L Limit

Who Must Comply with Gratuity Law?

Employers Covered:

Every factory, mine, oilfield, plantation, port, and railway company
Every shop or establishment employing 10 or more persons on any day in the preceding 12 months
Once applicable, continues even if headcount falls below 10

Employee Eligibility:

Permanent: 5 years continuous service (Section 4(1))
Fixed-Term: 1 year (Social Security Code 2020, effective 21 Nov 2025)
Death/Disablement: Minimum service requirement waived entirely
4 years 8 months (240+ days): Courts have treated as 5 years in multiple judgments

Payable When: Superannuation, resignation (after min service), retirement, death (to nominee), disablement.

6 Gratuity Services by Patron Accounting

Service	What We Do
Gratuity Calculation	Accurate 15/26 computation with correct salary components (Basic + DA), service year rounding (6-month rule), and Rs 20 lakh tax-free limit checks.
Actuarial Valuation (Ind AS 19 / AS 15)	Professional actuarial assessment using projected unit credit method with mortality tables, attrition rates, salary growth, and discount rates for balance sheet reporting.
Gratuity Trust Setup	Establishing a gratuity trust fund, Income Tax department registration, and ongoing fund management advisory.
Compliance Advisory	Ensuring compliance with the Act including nomination forms (Form F), annual returns (Form L by 31 January), and record-keeping requirements.
Payout Processing	Final gratuity computation, TDS deduction (if exceeds Rs 20 lakh), and timely disbursement within the 30-day statutory window.
New Labour Code Transition	Impact assessment of Social Security Code 2020 on gratuity liability - fixed-term employee eligibility (1 year) and 50% wage rule restructuring.

Our Process

7-Step Gratuity Compliance Procedure for Employers

Patron Accounting handles end-to-end gratuity compliance - from applicability assessment and Form F collection to actuarial valuation and Form L annual return filing.

Step 1

Determine Applicability

Verify if the establishment employs 10 or more persons on any day in the preceding 12 months. Once applicable, the Act continues even if headcount drops below 10 (Section 1(3), Payment of Gratuity Act, 1972).

Applicability confirmed Threshold checked

Assessed01

Step 2

Collect Nomination Forms (Form F)

Every employee must submit Form F within 30 days of completing 1 year of service. Nominations can be modified by submitting a fresh Form F (Section 6, Payment of Gratuity Act).

Form F collected Nominees recorded

Collected02

Step 3

Maintain Service Records

Track continuous service dates, salary revisions (Basic + DA), and breaks in service for all employees. Records must be maintained for at least 3 years after exit.

Records maintained Basic+DA tracked

Tracked03

Step 4

Calculate Gratuity on Separation

Apply the 15/26 formula using last drawn Basic + DA and completed years of service. Round up if final year exceeds 6 months. Check against Rs 20 lakh tax-free limit (Section 10(10)(ii), IT Act).

Formula applied Limit checked

Calculated04

Step 5

Deduct TDS if Applicable

If gratuity exceeds the Rs 20 lakh tax-free limit, deduct TDS on the excess amount per the employee's income tax slab. Issue Form 16 with gratuity details.

TDS computed Form 16 issued

TDS Done05

Step 6

Pay Within 30 Days

Employer must determine and pay gratuity within 30 days of it becoming due. Delay attracts 10% p.a. simple interest from the date payable (Section 7(3A)). Non-payment: imprisonment up to 2 years.

Paid on time Interest avoided

Paid06

Step 7

File Annual Return (Form L)

Employers covered under the Act must file annual return Form L with the Controlling Authority by 31 January each year, containing details of employees who left and gratuity paid during the preceding year.

Form L filed 31 Jan deadline met

Return Filed07

Documents Required for Gratuity Compliance

Employee joining records and appointment letters
Salary registers (Basic + DA breakup for each month)
Attendance and leave records (for continuous service verification)
Form F (nomination forms) for all employees
Separation/resignation/termination letters
Previous gratuity payment records
Actuarial valuation report (for Ind AS 19 / AS 15 reporting)
Form I (employee's application for gratuity payment)
Form L (employer's annual return to Controlling Authority)

4 Common Gratuity Challenges and Solutions

Challenge	Impact	How Patron Accounting Solves It
Salary Component Confusion	Employers calculate on gross salary or CTC instead of Basic + DA. Leads to overpayment or disputes	Strictly use Basic + DA only. Under the new Labour Code's 50% wage rule, restructure salary to ensure wages are at least 50% of total remuneration.
Service Year Disputes	Employees leaving at 4 years 10 months claim 5-year eligibility. Courts have treated 4 years + 240 days as 5 years	Apply the 240-day rule consistently. Document service periods precisely. Track attendance records meticulously.
Fixed-Term Liability (New Code)	Social Security Code 2020 (21 Nov 2025) makes fixed-term employees eligible after 1 year, dramatically increasing liability	Re-assess gratuity provisions, update actuarial valuations, and account for increased liability as past service cost under Ind AS 19.
Outdated Actuarial Assumptions	Companies under Ind AS use outdated discount rates, attrition, and salary projections for actuarial valuations	Engage qualified actuaries annually with updated discount rates, attrition assumptions, and salary escalation projections.

Gratuity Service Pricing

Fee Component	Amount
Gratuity Calculation (up to 50 employees)	Rs 4,999 per batch
Actuarial Valuation - up to 100 employees	Rs 9,999
Actuarial Valuation - 100 to 500 employees	Rs 14,999
Actuarial Valuation - 500+ employees	Custom quote
Gratuity Trust Setup Advisory	Rs 24,999
Annual Compliance (Form L + records + advisory)	Rs 7,999/year
New Labour Code Impact Assessment	Rs 9,999
Complete Package (calc + valuation + compliance)	Rs 19,999/year

All fees and charges listed are indicative only and do not constitute a binding offer. Final amounts may vary depending on the volume of work and the complexity involved.

Professional service charges for drafting, filing, and representation are separate from the statutory fees. The exact fee depends on the complexity of the case, disputed amount, and number of hearings required. Contact us for a detailed quote.

Get a free Gratuity Compliance consultation - Call +91 945 945 6700 or WhatsApp us. No-obligation assessment.

Gratuity Service Timelines

Stage	Estimated Timeline
Gratuity calculation (per employee batch)	1-2 working days
Actuarial valuation report	5-7 working days
Gratuity trust setup	30-45 days
Annual return (Form L) preparation	2-3 working days
New Labour Code impact assessment	3-5 working days
Employee payout processing	Within 30-day statutory window

Important: Employer must pay gratuity within 30 days of it becoming due. Delay attracts 10% p.a. simple interest (Section 7(3A)). Annual return Form L must be filed by 31 January. The Social Security Code 2020 (effective 21 Nov 2025) requires immediate re-assessment of gratuity provisions for fixed-term employees.

Key Benefits

Benefits of Professional Gratuity Services

Legal Compliance

Accurate calculation prevents disputes, forfeiture challenges, and interest liability for delayed payment under Section 7(3A). Form L filed by 31 January.

Correct Financial Reporting

Actuarial valuations under Ind AS 19 ensure your balance sheet reflects true gratuity liability. Zero audit qualifications on our valuations.

New Code Readiness

Proactive assessment of Social Security Code 2020 impact on fixed-term employees prevents surprise liability recognition and salary restructuring.

Tax Optimization

Correct TDS treatment and Rs 20 lakh exemption computation ensures no excess tax on employees or penalties on employers.

Dispute Prevention

Proper documentation, nomination forms (Form F), and service records create a defensible compliance trail if claims are contested.

Why Employers Trust Patron Accounting

500+ Employers Served from 10-employee shops to 5,000+ manufacturing units.

1,200+ Actuarial Valuations across Ind AS 19 and AS 15 frameworks.

4.9 Google Rating based on verified reviews.

15+ Years of Practice.

4 Offices: Pune, Mumbai, Delhi, and Gurugram.

DIY vs Professional Gratuity Management

Parameter	DIY / In-House	Professional (Patron Accounting)
Formula Accuracy	Risk of wrong salary base (CTC vs Basic+DA)	Strict 15/26 with correct components
Service Year Counting	Manual errors in rounding	Automated with 240-day rule
Actuarial Valuation	Often skipped or generic template	Ind AS 19 compliant with current assumptions
Labour Code Readiness	Reactive when notices arrive	Proactive assessment and transition plan
Annual Return Filing	Often missed	Form L filed by 31 January deadline
Cost	Internal HR time + risk	Rs 4,999 onwards per engagement

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Pvt Ltd Compliance - Annual ROC and statutory compliance.

Legal Framework for Gratuity

Governing Law: Payment of Gratuity Act, 1972; Social Security Code, 2020 (effective 21 Nov 2025).

Key Provisions:

Section 4(1): Gratuity payable after 5 years continuous service (permanent).
Section 4(6): Forfeiture for misconduct (violence, moral turpitude).
Section 7: Must pay within 30 days. Interest at 10% p.a. on delay.
Section 9: Non-payment: imprisonment up to 2 years or Rs 20,000 fine or both.
Section 10(10)(ii) IT Act: Tax-free limit Rs 20 lakh (private). Govt: fully exempt.
Ind AS 19 / AS 15: Mandatory actuarial valuation for financial reporting.
SSC 2020: Fixed-term eligible after 1 year. 50% wage rule for salary restructuring.

Frequently Asked Questions - Gratuity

Answers about gratuity formula, eligibility, tax-free limit, forfeiture, actuarial valuation, new Labour Code, and payment deadlines.

Quick Answers

Q: Gratuity formula? A: (15 x Basic+DA x Years) / 26 for covered; /30 for non-covered.

Q: Minimum service? A: 5 years permanent; 1 year fixed-term (new code); waived for death/disability.

Q: Tax-free limit? A: Rs 20 lakh lifetime cap for private employees.

Q: Payment deadline? A: 30 days from date of becoming due.

Q: Interest on delay? A: 10% p.a. simple interest under Section 7(3A).

New Labour Code Effective - Reassess Your Gratuity Liability Now

The Social Security Code 2020 (effective 21 November 2025) has expanded gratuity eligibility to fixed-term employees after just 1 year of service. The 50% wage rule may require salary component restructuring. Companies that have not re-assessed their gratuity provisions face surprise liability recognition.

Employers must pay within 30 days of separation. Delay attracts 10% p.a. interest. Non-payment: imprisonment up to 2 years. Annual return Form L due by 31 January.

Action: Call +91 945 945 6700 or WhatsApp us for a free assessment.

Secure Your Gratuity Compliance Today

Gratuity compliance sits at the intersection of labour law, tax planning, and financial reporting. The Payment of Gratuity Act mandates the 15/26 formula, 30-day payment, and proper record-keeping.

The Social Security Code 2020 (21 November 2025) has expanded eligibility to fixed-term employees after 1 year, significantly increasing liabilities. Companies under Ind AS must carry actuarial valuations reflecting these changes.

Patron Accounting: 500+ employers. 1,200+ actuarial valuations. Offices in Pune, Mumbai, Delhi, and Gurugram. Starting from Rs 4,999.

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Content Created: 11 March 2026 | Last Updated: 11 March 2026 | Next Review: 11 November 2026 | Reviewed By: CA & CS Team, Patron Accounting LLP

This page is reviewed annually. Content aligned with Payment of Gratuity Act 1972, Social Security Code 2020, and Ind AS 19. Next review: November 2026.

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