Gratuity is an amount that a company gives to its employee in return for his long service. This can also be called a kind of ‘loyalty reward’. In India, under the Payment of Gratuity Act, 1972, it is mandatory for all establishments employing 10 or more employees to pay gratuity. This amount is usually available on retirement, resignation or in certain special circumstances.
What changed after the new labor code?
Earlier, to receive gratuity it was necessary to complete at least 5 years of continuous service. But, after the new labor code came into force in 2025, ‘fixed-term’ employees—especially contract or ‘gig’ workers—have got a lot of relief. Now, such employees become entitled to gratuity only after completing one year of service. Nevertheless, the condition of 5 years of service for regular employees is still applicable.
How is gratuity calculated?
The formula to calculate gratuity is quite simple:
Gratuity = Last received salary × Years of service × (15/26)
Here, “last received salary” includes basic salary and dearness allowance (DA). Here 26 means that the working days in the month are 26, while 15 means that the calculation is being done on the basis of 15 days’ salary.
How much amount will you get after 10, 20 and 30 years of service?
If the last salary and length of service of an employee are different, the amount of gratuity he will receive will be as follows:
10 years of service, salary ₹ 50,000: approximately ₹ 2,88,461
20 years of service, salary ₹ 60,000: approximately ₹ 6,92,307
30 years of service, salary ₹ 70,000: approximately ₹ 12,11,528
In other words, as your years of service and salary increase, the amount of gratuity you receive also increases. Maximum limits and requirements
According to the law, private sector employees are entitled to a maximum gratuity of up to ₹20 lakh, while for central government employees the limit is up to ₹25 lakh. Additionally, even if an employee passes away before completing five years of service, the entire amount of gratuity is paid to his nominee or family.
Why is it important to understand gratuity?
Gratuity is a very important part of retirement planning. This is a large lump sum amount received at the end of the job, which helps in future financial security. Therefore, every employee should completely understand the methods of its calculation and the rules related to it.