Gratuity Calculation Formula in India: The 15/26 Rule, Eligibility & ₹20 Lakh Exemption (2026)

1. Applicability of the Payment of Gratuity Act, 1972

Under Section 1(3) of the Act, gratuity is mandatory for:

• Every factory, mine, oilfield, plantation, port, and railway company.
• Every shop or commercial establishment having 10 or more employees on any day of the preceding 12 months.
• Once an establishment becomes covered under the Act, it continues to be governed by the Act even if the employee headcount later drops below 10.

2. The 15/26 Formula Explained: Why 26 Days?

For establishments covered under the Act, Section 4(2) mandates that gratuity must be calculated at the rate of 15 days' wages for every completed year of service or part thereof in excess of six months.

Why is the denominator 26 and not 30?

In the landmark Supreme Court case Digvijay Woollen Mills Ltd. vs. Mahendra Prataprai Buch (1980), the Supreme Court clarified that a month consists of 26 working days after deducting 4 Sundays (statutory weekly rest days). To calculate an employee's daily wage from monthly salary, the monthly wage is divided by 26, and then multiplied by 15 days.

3. What Counts as "Last Drawn Salary"?

This is the single most debated question during Full & Final (FnF) settlements. Section 2(s) of the Payment of Gratuity Act defines wages as all emoluments earned by an employee while on duty or on leave with wages.

4. Eligibility & The "4 Years 240 Days" Rule

Normally, gratuity is payable upon separation (resignation, retirement, or superannuation) only after an employee has rendered continuous service for not less than 5 years (Section 4(1)).

5. Rounding of Service Tenure

Under Section 4(2), any service period in excess of six months is rounded off to the next complete year:

• Tenure of 5 years 7 months is rounded to 6 years.
• Tenure of 5 years 4 months is counted as 5 years.
• Tenure of 7 years 6 months 1 day is rounded to 8 years.

6. Step-by-Step Calculation Examples

7. Covered vs. Non-Covered Establishments (The 15/30 Formula)

If an establishment is not covered under the Payment of Gratuity Act (e.g. organizations with fewer than 10 workers that never registered), gratuity is calculated based on half a month's salary (15 days out of 30) for each completed year:

Note that in non-covered establishments, incomplete years (even 11 months) are strictly discarded, unlike the 6-month rounding rule in covered establishments.

8. Income Tax Exemption Limits under Section 10(10)

Gratuity taxation is divided into three distinct buckets under the Income Tax Act:

9. Forfeiture & 30-Day Payment Timeline Mandate

When can gratuity be forfeited?
Under Section 4(6) of the Act, gratuity can only be forfeited if the employee's services were terminated for:

• Riotous or disorderly conduct or any act of violence.
• An offense involving moral turpitude committed in the course of employment.
• Causing willful damage or loss to employer property (limited strictly to the actual value of damage proved).

The 30-Day Mandatory Settlement Window:
Section 7(3) mandates that the employer must determine and disburse the gratuity amount within 30 days of the employee's exit. Under Section 7(3A), if payment is delayed beyond 30 days, the employer must pay simple interest (typically 10% per annum) unless the delay was caused by the employee.

10. Automate Gratuity & Full & Final Settlements with MicroPlesk

Manually managing tenure dates, basic salary historical increments, and Section 2A continuous service days across spreadsheets inevitably leads to audit warnings and employee dissatisfaction during Full & Final settlements.

With MicroPlesk, gratuity calculation is built right into the employee exit workflow. The system automatically evaluates total active tenure, checks 5-year thresholds, verifies last drawn Basic + DA, computes the 15/26 formula, and generates compliant FnF settlement sheets with zero manual calculation errors.