What gratuity means
Gratuity is a lump sum your employer pays you when you leave after a qualifying period of service. For a permanent employee, that period is 5 years. Staff on a fixed-term contract qualify after 1 year, under the new Labour Codes in force since 21 November 2025.
It works like a thank-you for long service, but it isn’t a gift. It follows a set formula, and many employers show a yearly provision for it inside your CTC (cost to company).
The formula
Gratuity = 15/26 × last monthly basic pay plus DA × years of service
DA is the dearness allowance, an extra payment some employers add to basic pay. The 15/26 part means 15 days’ pay for each year of work, with a month counted as 26 working days.
Lakshmi’s gratuity
Lakshmi, 35, is a permanent employee. She resigns after 8 full years. Her last basic pay plus DA is ₹40,000 a month. She is a made-up example.
15/26 × ₹40,000 × 8 = ₹1,84,615
That is one cheque at the end, not monthly money. Each year of service added ₹23,077 to the total.
Her CTC had already counted this. The Salary calculator shows a gratuity provision of ₹1,923 a month for a ₹40,000 basic. Over a year, that is ₹23,076, roughly one year’s worth of gratuity. The provision is part of her “cost to company”, but she never received it in her salary. She got it only because she stayed long enough.
Two other cases:
- If Lakshmi had been permanent and left after 4 years, she would usually get no gratuity, because she would not have reached 5 years.
- If she had been on a fixed-term contract and left after 1 year, she would get ₹23,077.
Tax
Gratuity is tax-exempt up to ₹20 lakh. Lakshmi’s ₹1,84,615 is far below that limit.
Where you see gratuity
- Offer letter or CTC breakup: a line called “gratuity” or “gratuity provision”.
- Your payslip: usually not shown, since nothing is cut or paid each month.
- Your full and final settlement statement when you leave, where the actual amount appears.
Common mix-ups
People often count gratuity as part of their yearly income. It isn’t, until you qualify and leave. If you change jobs every two or three years as a permanent employee, the gratuity line in your CTC may never turn into cash. Compare offers on fixed monthly pay first.
Gratuity is tied to your service with one employer. When you join a new company, the count starts again from zero.
The formula uses basic pay plus DA, not your gross salary. A small basic means a small gratuity. The Labour Codes add a check here: if allowances are more than 50% of your pay, part of them is added back to “wages” for gratuity. State rules under the Labour Codes vary, so check with HR.
What to check
- Find the gratuity line in your CTC breakup and note your basic pay plus DA.
- Work out your years of service with this employer so far.
- Ask HR how they count a part year, and whether you are permanent or fixed-term.
- Before you resign close to a 5-year mark, check your exact joining date.
To see how gratuity fits into your CTC, try the Salary calculator. Your numbers stay on your device.