What is the formula for calculating gratuity in India?

For establishments covered under the Payment of Gratuity Act 1972, the formula is: Gratuity = (15 × Last Drawn Basic Salary & DA × Completed Years of Service) / 26. Here, 26 represents the working days in a month, and 15 represents 15 days of wages for each completed year.

Is 5 years of continuous service mandatory to receive gratuity?

Generally, yes, an employee must complete 5 years of continuous service. However, under judicial precedents (including Madras High Court rulings), completing 4 years and 240 days in the 5th year fulfills the 'continuous service' criteria under Section 2A. Furthermore, the 5-year condition is waived entirely in cases of employee death or disablement.

What is the maximum tax-free gratuity limit?

Under Section 10(10) of the Income Tax Act, the maximum lifetime tax-exempt gratuity for non-government private sector employees is ₹20,00,000 (₹20 Lakhs). Any amount received above ₹20 Lakhs is added to taxable income under the head 'Salaries'.

Retirement & Separation • Statutory Guide

Gratuity Calculation (Payment of Gratuity Act 1972)

Gratuity is a lump-sum statutory benefit paid by an employer to an employee upon resignation, retirement, or superannuation as an appreciation for long-term service. In India, it is governed by the Payment of Gratuity Act, 1972.

The Standard 15/26 Statutory Gratuity Formula

Gratuity = (15 × Last Drawn Basic + DA × Completed Years of Service) / 26

• 15: 15 days of wages

• 26: Working days per month

• Max Tax-Free: ₹20,00,000

1. Eligibility Conditions

Establishment Coverage: Applies to any factory, mine, oilfield, plantation, port, railway company, and shop/establishment employing 10 or more persons on any day of the preceding 12 months.
Tenure Requirement: Continuous service of not less than 5 years is mandatory upon termination, resignation, or retirement.
4 Years & 240 Days Rule: Under Section 2A, if an employee completes 240 working days in their 5th year (in a 6-day workweek company) or 190 days (in a 5-day workweek company), courts have recognized them as fulfilling the 5-year requirement.
Exceptions: The 5-year condition does not apply in cases of death or total disablement due to accident or disease.

2. Rounding of Service Years

When an employee works for a fraction of a year beyond completed years:

• More than 6 months (7+ months): Rounded UP to the next full year (e.g., 6 years and 7 months = 7 years).

• Less than 6 months (1–5 months): Ignored (e.g., 6 years and 4 months = 6 years).

3. Practical Calculation Example

Suppose an employee resigns after working for 8 years and 8 months. Their last drawn salary details:

• Basic Salary: ₹48,000 / month

• Dearness Allowance (DA): ₹2,000 / month

• Total Last Drawn Basic + DA: ₹50,000

• Recognized Service: 9 Years (rounded up from 8 years 8 months)

Calculation Step:

Gratuity = (15 × 50,000 × 9) / 26 = ₹6,750,000 / 26 = ₹2,59,615.38

Since this amount is well under the ₹20 Lakh statutory cap, the entire ₹2,59,615 is 100% tax-free.

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