Gratuity is the exit payment most small businesses forget to provision for and then discover at the worst moment. The arithmetic is simple; the record-keeping is what goes wrong.
Gratuity in India is calculated as 15 days' wages for every completed year of service, using the formula: last drawn wages × 15 ÷ 26 × years of service. "Wages" means basic pay plus dearness allowance; 26 represents working days in a month; and service beyond six months in the final year counts as a full year. It is payable by establishments with 10 or more employees to anyone who leaves after five years of continuous service — or, since the labour codes took effect in November 2025, after one year for fixed-term employees, pro rata. Gratuity received is tax-free up to ₹20 lakh. Facts checked 11 September 2026.
Gratuity = last drawn wages × 15 ÷ 26 × years of service
For employers not covered by the Act (fewer than 10 employees) who nonetheless pay gratuity, a half-month's average salary per year on a 30-day basis is the usual convention, but it is contractual rather than statutory.
| Example 1 | Basic + DA ₹30,000; service 7 years 2 months → 7 years. 30,000 × 15 ÷ 26 × 7 = ₹1,21,154. |
|---|---|
| Example 2 | Basic + DA ₹30,000; service 7 years 8 months → rounds to 8 years. 30,000 × 15 ÷ 26 × 8 = ₹1,38,462. Six months and one day is worth a full year's gratuity — employees know this; your provisioning should too. |
| Example 3 (fixed-term) | Basic + DA ₹25,000; 18-month fixed-term contract completed. Pro rata: 25,000 × 15 ÷ 26 × 1.5 = ₹21,635. Before November 2025 this employee received nothing. |
Gratuity received by an employee is exempt from income tax up to ₹20 lakh across their working life; amounts above that are taxable as salary. The employer must pay within 30 days of the amount becoming due — the date of leaving — and interest applies to late payment. In practice gratuity is settled with the full and final settlement, which makes the exit date the deadline.
Gratuity accrues at 15 ÷ 26 of a month's wages per year — 4.81% of basic plus DA. A company with ten employees on an average ₹25,000 basic accrues roughly ₹12,000 a month in future gratuity. Over five years that is ₹7.2 lakh that will be paid out as people leave, whether or not it was ever booked.
Two things make it manageable. First, carry a monthly provision in the accounts at 4.81% of basic for every employee, from their joining date. Second, keep the inputs where they cannot drift: joining date, every salary revision with its effective date, and the exit date. The calculation is one line; the argument is always about the inputs. Why CTC history has to be a record.
| Formula | Last basic + DA × 15 ÷ 26 × completed years |
|---|---|
| Eligibility | 5 years' continuous service (regular); 1 year pro rata (fixed-term, since Nov 2025) |
| Rounding | Final year counts as a full year if service in it exceeds six months |
| Applies to | Establishments with 10 or more employees |
| Tax | Exempt up to ₹20 lakh lifetime |
| Due | Within 30 days of leaving |
| Monthly accrual | ≈ 4.81% of basic + DA |
Gratuity equals last drawn basic pay plus dearness allowance, multiplied by 15, divided by 26, multiplied by completed years of service. Service in the final year counts as a full year if it exceeds six months. On wages of ₹30,000 and seven years of service the gratuity is ₹1,21,154.
Several High Court decisions treat 240 days worked in the fifth year as completing five years of service for gratuity, but the position is not uniform across India. Many employers pay on that basis to avoid a dispute; if you intend not to, take advice for your state before refusing.
Yes. Under the Code on Social Security, which came into force on 21 November 2025, a fixed-term employee who completes one year of continuous service is entitled to gratuity on a pro-rata basis, rather than needing five years.
On basic pay plus dearness allowance — the statutory definition of wages — not on gross or CTC. Under the labour codes, if excluded allowances exceed 50% of total remuneration, the excess is added back into wages, which increases the gratuity base for employees whose basic was set low.
Gratuity received is exempt from income tax up to a lifetime limit of ₹20 lakh. Any amount above that is taxed as salary income in the year received.
Within 30 days of the date it becomes payable, which is the employee's last working day. Late payment attracts simple interest. In practice it is settled with the full and final settlement, so the exit date is the deadline.
Merik does not compute gratuity, and says so. What it does is keep the three inputs the calculation depends on from drifting: each employee's joining date, every salary revision stored with its effective date so the last drawn basic is a record rather than a memory, and the exit date when the employee leaves. Merik's default structure sets basic at 50% of gross, which is also the labour-code wages floor, so the base you calculate on is the one the law expects.
At exit, the attendance and leave records feed the final month's pay and any leave encashment, and the payslip history shows every revision. Gratuity is one line of arithmetic on top. See the employee and payroll modules.
What to check, calculate, and how to close out cleanly.
The 50% wages rule, fixed-term gratuity, 180-day leave, wages by the 7th — decoded.
How to structure revisions, effective dates and arrears cleanly.