Gratuity Calculation in Payroll Software in India (2026)

Gratuity is the payroll liability that most small companies ignore until an employee with five years of service resigns and asks for it. Then someone opens a calculator, someone else argues about which salary component counts, and the payout turns into a small legal question. Since the labour codes came into force on 21 November 2025, the definition of wages and the rules for fixed-term staff have both changed, which makes it worth revisiting how you calculate it.

This guide explains how gratuity is calculated, what changed under the labour codes, what payroll software should automate, and where PeopleVio fits and doesn't.

Rules below are as of 21 September 2026. Statutory provisions change by notification, so confirm your specific case with your accountant or a labour-law consultant before paying out.

What gratuity is

Gratuity is a lump sum an employer pays an employee in gratitude for long service, governed by the Payment of Gratuity Act (now covered under the Code on Social Security, 2020). It generally applies to establishments with 10 or more employees.

• Eligibility: generally five years of continuous service with the employer. The five-year condition is waived in cases such as death or disablement.
• Payable on: resignation, retirement, superannuation, death or disablement.
• Who pays: the employer, and the liability builds up every year an employee stays.

The formula

Gratuity = (Last drawn wages × 15 × Years of service) ÷ 26

"Wages" here means Basic plus Dearness Allowance, plus any retaining allowance. The 26 stands for the working days in a month, and 15 is the number of days' wages earned per completed year of service.

Example: an employee with last drawn Basic of ₹40,000 and 8 years of service. ₹40,000 × 15 × 8 ÷ 26 = ₹1,84,615

The amount is capped at ₹20 lakh, which is also the income-tax exemption limit for employees of private employers covered under the Act.

What changed under the labour codes

• Fixed-term employees now qualify for pro-rata gratuity after just one year of continuous service, instead of five.
• A uniform definition of wages applies across the codes, under which wages generally must be at least half of total remuneration. For companies that keep Basic low and push the rest into allowances, this can raise the gratuity base.
• The change is prospective. The Ministry of Labour and Employment has confirmed that gratuity on the revised wage definition applies from 21 November 2025.

Whether your salary structure needs restructuring, and how it affects your accrued liability, is a question for your accountant. The software point is narrower: your payroll tool must let you define which components count as wages.

Why manual gratuity tracking goes wrong

• Nobody tracks tenure. The date of joining sits in a spreadsheet, and nobody notices who crosses five years.
• The wage base drifts. Basic changes at each increment, and the payout uses the last drawn figure, not an old one.
• Fixed-term staff get missed. The one-year rule is easy to overlook.
• Nothing is provisioned. A large payout arrives with no budget behind it.
• Final settlement is rushed. Gratuity, notice pay, leave encashment and the last salary are calculated separately and inconsistently.

What payroll software should do about gratuity

1. Store the joining date and calculate continuous service accurately, including any breaks.
2. Define the wage base so you choose which components count as wages.
3. Calculate accrued gratuity for each employee, so you can see the running liability.
4. Flag eligibility when an employee crosses the service threshold, including the one-year rule for fixed-term staff.
5. Apply the cap and produce a clear working for the payout.
6. Feed final settlement, so gratuity, leave encashment and the last salary come together in one payslip.
7. Report the total liability, so finance can provision for it.

Questions to ask any vendor

• Does the platform calculate gratuity automatically, or is it a manual field?
• Can I choose which salary components form the wage base?
• Does it handle the one-year rule for fixed-term employees?
• Can I see the total accrued liability for the company?
• Is gratuity part of a final settlement flow with leave encashment and notice pay?

How the main options fit

Platform	Gratuity fit
greytHR	Long associated with statutory and compliance depth in India
Keka	Statutory and final-settlement support suited to mid-size and larger companies
Zoho People + Zoho Payroll	Payroll features sit in the separate Zoho Payroll product, so compare the combined cost
HROne	Positioned for larger workforces with compliance needs
PeopleVio	Handles the payroll around it, but does not calculate gratuity. See below

Capabilities change often, so treat this table as a starting point and confirm each vendor's current gratuity features in a trial with your real employee data.

An honest note on where PeopleVio stands

PeopleVio does not calculate gratuity, does not track accrued gratuity liability and does not have a final-settlement module. Don't buy it expecting those.

What it does provide:

• Configurable salary structures (Basic, HRA, allowances, deductions) and custom pay components for earnings or deductions.
• One-click monthly payroll prorated for attendance, with PDF payslips.
• Employee-initiated, admin-approved resignation, after which the employee is marked inactive automatically.
• TDS with old and new regime rules and employee declarations, when an admin enables TDS in company settings.
• Attendance, leave, comp off, expenses, offer letters, assets and an org chart.

If an employee is owed gratuity, your accountant would calculate it using the formula above, and you can pay it as a custom pay component in the relevant month. The software will not work out the amount, flag eligibility or show the liability.

That makes PeopleVio a reasonable fit for a small company with few long-tenured employees and an accountant handling settlements. It is not the right choice if you want the payroll system to own gratuity and full-and-final settlement.

A worked example: a 60-person company with a few long-tenured staff

Suppose a company has 60 employees, 4 of whom have crossed five years and 6 of whom are on fixed-term contracts.

• The 4 long-tenured employees carry an accrued liability that grows every year, and the last drawn Basic decides the payout.
• The 6 fixed-term employees become eligible for pro-rata gratuity after one year, so a contract ending at 14 months now carries a payout that it did not carry before.
• If nobody tracks these dates, the first resignation becomes a scramble to reconstruct service length and salary history.

The takeaway is not which software you buy. It is that someone, or something, must track tenure and liability before the first payout is due.

Common mistakes with gratuity

• Using Gross instead of the wage base. The formula uses Basic plus DA, not total pay.
• Forgetting fixed-term employees. The one-year rule applies to them.
• Not provisioning. Book the liability each year, not when the cheque is due.
• Using an old salary. The last drawn wages decide the payout.
• Paying without a working. Keep a written calculation on file for every payout.
• Ignoring the salary structure. Under the uniform wage definition, check with your accountant whether your Basic share is still appropriate.

Frequently asked questions

What is the gratuity formula? Gratuity = last drawn wages × 15 × years of service ÷ 26, where wages are Basic plus Dearness Allowance plus any retaining allowance.

Who is eligible for gratuity? Generally employees with five years of continuous service, on resignation, retirement, superannuation, death or disablement. Under the labour codes, fixed-term employees are eligible pro rata after one year.

Is there a limit on gratuity? The amount is capped at ₹20 lakh, which is also the tax exemption limit for private-sector employees covered under the Act.

Did the labour codes change how wages are defined? Yes. A uniform definition of wages applies, under which wages generally must be at least half of total remuneration, and the Ministry has confirmed the revised definition applies to gratuity prospectively from 21 November 2025.

Does PeopleVio calculate gratuity? No. PeopleVio does not calculate gratuity, track accrued liability or run a final-settlement flow. You can pay a calculated amount as a custom pay component.

Does PeopleVio have a resignation flow? Yes. Resignation is employee-initiated and admin-approved, and the employee is marked inactive automatically once approved.

How much does payroll software cost for a 60-person company? On PeopleVio, 60 employees falls in the 26 to 100 band at ₹49 per employee per month (₹41 yearly), so about ₹2,940 a month on monthly billing. Compare total cost, including any separately sold payroll module, for every vendor.

Should a small company provision for gratuity? Yes, if it is covered by the Act and has employees approaching the eligibility threshold. Provisioning each year avoids a large unplanned payout, and your accountant can advise on the method.

The bottom line

Gratuity is a small formula with a long tail: tenure tracking, a wage base you must define correctly, a one-year rule for fixed-term staff and a liability nobody sees until it lands. Choose a tool that calculates and reports it if you have many long-tenured or fixed-term employees. PeopleVio covers attendance, leave, payroll and TDS, and leaves gratuity to your accountant, so pick it only if that split suits you. Whatever you choose, keep a written working for every payout.

Want to see how payroll works in PeopleVio? Check the pricing or get in touch and we'll set up a workspace for you.