Six Months and One Day Can Be Worth a Full Year of Gratuity
The rounding rule in the Code is the single largest lever most employees have over their gratuity, and it is entirely a question of resignation timing.
The formula, and what counts as salary
For an employer covered by the Code, gratuity is fifteen days of pay for every completed year of service, where a month is treated as twenty-six working days.
Code on Social Security, 2020, section 53
Gratuity = 15 × (Last drawn Basic + DA) × Years ÷ 26
- Wages are Basic plus Dearness Allowance; if allowances left out of wages exceed half of total remuneration, the excess is added (section 2(88))
- Employees outside the Code: ÷ 30 and a ten-month average salary
The salary component catches people out. Gratuity is calculated on Basic plus DA, not on total CTC. Where an employer structures a package with a low basic and large allowances, the gratuity entitlement is correspondingly smaller. Since the Code took effect that has a limit: if allowances left out of wages exceed half of total remuneration, the excess is added back to wages, so a very low basic no longer shrinks gratuity as far as it once did.
The rounding rule
Under the Code, a part-year of more than six months counts as a full year. Six months or fewer is discarded entirely.
The practical consequence: leaving at ten years and seven months pays the same as eleven full years, while leaving at ten years and six months pays as ten. On a ₹50,000 basic that one-month difference is worth close to ₹29,000.
Employees outside the Code are not covered by this rounding, which is why the toggle above changes the answer as much as it does.
The five-year cliff, and fixed-term contracts
For a permanent employee, gratuity requires five years of continuous service. At four years and eleven months the statutory entitlement is zero — there is no partial accrual.
Fixed-term employees are treated differently since the Code took effect on 21 November 2025. The five-year minimum does not apply when the contract ends, gratuity is paid pro rata, and the Ministry of Labour has clarified that one year of service qualifies. Choose the employment type above to see the difference.
The rule is waived if service ends through death or permanent disablement, in which case gratuity is payable regardless of tenure. Some employers pay gratuity voluntarily before five years; that payment is fully taxable, because the statutory exemption does not apply to it.
Tax treatment
For non-government employees covered by the Code, gratuity is exempt up to a ceiling that applies across your entire career, not per employer. Someone who received exempt gratuity at a previous job has correspondingly less headroom at the next.
Anything above the ceiling is taxable as salary income in the year received. Government employees receive gratuity fully exempt.