Gratuity Rules & Calculation for FY 2025-26: Higher Limits, Tax Exemptions & New Guidelines

With the rising wage ceiling under the Payment of Gratuity Act, 1972 (amended in 2025), more employees now qualify for higher gratuity amounts. The government has increased the wage ceiling for gratuity calculation to ₹25 lakh (from ₹20 lakh earlier) and the tax-exempt gratuity limit under Section 10(10) has also been aligned to ₹25 lakh for private sector employees. These changes apply to employees retiring or resigning on or after 1 April 2025. Use our Gratuity Calculator to estimate your entitlement instantly.

Key Updates for FY 2025-26

• Higher Tax-Free Limit: Gratuity received up to ₹25 lakh is fully exempt from income tax (Section 10(10)) for private sector and government employees.
• Wage Ceiling Increase: Monthly salary/wages for gratuity formula now capped at ₹25,000 (or actual, whichever is lower) for calculation purposes.
• Eligibility: Completion of 5 years of continuous service (4 years & 240 days in some court rulings for the 5th year).
• Forfeiture Rules Clarified: Gratuity can be forfeited only for moral turpitude or willful damage; partial forfeiture not allowed otherwise.

Gratuity Calculation Formula

Last drawn salary × 15/26 × Completed years of service (rounded up for 6+ months in the last year)

• Last drawn salary = Basic + Dearness Allowance (DA). HRA, bonuses, and overtime are excluded.
• 15 days' salary for each completed year (or part thereof exceeding 6 months).
• No upper service limit — gratuity increases with longer tenure.

Example Calculations

Scenario 1: Basic + DA = ₹80,000 | Service = 12 years 8 months → Gratuity = ₹80,000 × 15/26 × 13 years = ₹6,00,000 (fully tax-free up to ₹25 lakh).

Scenario 2: Basic + DA = ₹1,50,000 | Service = 25 years → Capped salary = ₹25,000 × 15/26 × 25 = ₹3,60,577 (still well below ₹25 lakh exempt limit).

Nomination & Payment Timeline

• Submit Form F (nomination) within 30 days of joining or update after marriage/child birth.
• Employer must pay gratuity within 30 days of it becoming due; delay attracts 10% p.a. simple interest.
• In case of death, full gratuity (without service limit) goes to nominee/family.

Special Cases

• Government Employees: Different formula (half month's salary × years × 2) but same ₹25 lakh tax-exempt limit.
• Contract/Apprentice: Eligible only if re-designated as permanent employee.
• Resignation/Retrenchment: Eligible after 5 years; no forfeiture unless misconduct proven.

Pro Tip: Keep payslips and appointment letter handy. If employer delays or denies gratuity, approach the Controlling Authority under the Payment of Gratuity Act within 90 days. Plan your retirement corpus using our Retirement Calculator including expected gratuity.