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How it is calculated

For employees covered by the Act, gratuity = (15 ÷ 26) × last drawn monthly salary (Basic + DA) × number of completed years of service. A period of six months or more in your final year counts as a full year. The total gratuity is tax-exempt up to a statutory ceiling of Rs 20,00,000.

The formula, and what counts as salary in it

For employees covered by the Payment of Gratuity Act the computation is prescribed rather than discretionary: last drawn salary multiplied by fifteen, multiplied by completed years of service, divided by twenty-six. Every term in that formula is narrower than it first appears. Salary means basic pay plus dearness allowance, and commission on turnover where that applies — not your cost to company, and not your gross monthly pay including allowances. This is why two employees on identical packages can be owed materially different amounts: the one whose structure carries a low basic gets less, because the basic is what the formula reads. The fifteen represents fifteen days of wages for each completed year, and the twenty-six is the number of working days assumed in a month, excluding Sundays. For employees not covered by the Act the basis differs, commonly using a divisor of thirty and half a month's salary per year.

Five years, and the rounding rule inside it

The general condition is five years of continuous service with the same employer, which is why departures in the fifth year are worth timing carefully. Within the calculation there is a rounding rule that has a real monetary effect: service beyond six months in the final year counts as a complete year, and less than six months is ignored. Ten years and seven months therefore counts as eleven, while ten years and five months counts as ten — a difference of one fifteen-day slice of salary, which on a moderate basic runs to tens of thousands of rupees. There is also an important exception to the five-year rule itself. On death or permanent disablement the requirement does not apply at all, and gratuity is payable to the nominee or heirs however short the service. Periods of authorised leave and sickness generally do not break continuity of service.

The tax exemption is a lifetime figure

Government employees receive gratuity entirely free of tax. For everyone else the exemption is the least of three amounts — the gratuity actually received, the amount produced by the statutory formula, and the prescribed monetary ceiling — with anything above that taxed at slab rates in the year of receipt. The detail that surprises people is that the ceiling applies across a working life rather than per employer. Exempt gratuity received when leaving an earlier job reduces what remains available on the next occasion, so someone receiving gratuity for the third time may find much less of it exempt than they expected. Keep a record of gratuity received and exempted at each exit, because reconstructing it decades later is difficult and the onus of showing the position is yours. Gratuity is also reported by the employer, so the figures are visible on both sides.

Claiming it, and what to do if it is refused

Gratuity is not paid automatically on the strength of goodwill. Submit the prescribed application to the employer after leaving and keep the acknowledgement, since the date of that application is what fixes the timeline. The employer must pay within a prescribed period of the amount becoming payable, and interest runs on delay as a matter of right rather than as a concession. The obligation sits with the employer whether or not they have funded a gratuity trust or insurance policy — the absence of a fund is not a defence. If payment is refused or delayed, ask for the refusal and its reasons in writing, then make a claim to the controlling authority under the Act, which sits within the labour department, is comparatively informal and inexpensive, and does not require a lawyer. There is an appeal from that authority, and time limits apply to the claim, so avoid an extended exchange of letters.

Who the Act actually covers

The Payment of Gratuity Act does not apply everywhere, and establishing whether it applies to you is the first step in any claim. Broadly it covers factories, mines, oilfields, plantations, ports, railways, and shops or establishments in which ten or more persons are employed, or were employed on any day in the preceding twelve months. The second limb matters: once the Act has applied to an establishment it continues to apply even if the headcount later falls below ten, which is a deliberate provision to prevent the obligation being shed by reducing staff. Employers outside the Act may still pay gratuity under contract or company policy, and many do, but there the entitlement, the formula and the conditions come from the appointment letter rather than from the statute. So read the appointment letter and the HR policy before assuming which basis applies, because the computation differs between the two.

Nomination is a five-minute task that saves months

Filing a nomination in the prescribed form at the start of employment is among the most useful pieces of paperwork anyone does, and among the most neglected. Nomination is ordinarily made in favour of family members; only where an employee has no family at the time may it be made in favour of someone else, and a nomination made in that situation becomes invalid once a family comes into existence, requiring a fresh one. It should be updated after marriage, the birth of a child or the death of a nominee. Where no valid nomination exists, payment to heirs requires evidence of succession, which means obtaining documents from a court or revenue authority — a process that takes months and arrives precisely when a family is least able to deal with it. Keep an acknowledged copy of the nomination yourself rather than relying on the employer's file.

Gratuity within the settlement, and on death

Gratuity is usually one line in a full and final settlement, and it is worth checking separately rather than accepting the net figure, because it follows a statutory formula while most other components follow company policy. Recompute it from your own last drawn basic and dearness allowance and your service dates, applying the six-month rounding rule, and query any difference. On death in service the position changes in two ways that families should know: the five-year qualifying period does not apply at all, so gratuity is payable however short the service, and the amount is paid to the nominee or heirs. Alongside it will sit provident fund, any leave encashment and possibly group insurance, each with its own form, its own nominee and its own timeline. Ask the employer for a written breakdown of every terminal payment rather than a single consolidated figure.

Frequently asked questions

Does the five-year rule always apply?

No. On death or permanent disablement the five-year qualifying period does not apply at all, and gratuity is payable to the nominee or heirs however short the service. Authorised leave and sickness generally do not break continuity of service either.

What if my employer has no gratuity fund?

It makes no difference to your entitlement. The obligation to pay sits with the employer whether or not they have funded a trust or an insurance policy, and the absence of a fund is not a defence. If payment is refused, a claim lies to the controlling authority under the Act.

How many years do I need to be eligible for gratuity?

Generally five years of continuous service with the same employer. This condition is waived if employment ends due to death or disablement.

Is gratuity taxable?

Gratuity received is exempt from income tax up to the prescribed limit (Rs 20 lakh for those covered by the Act). Any amount above the limit is taxable.

Is the 15/26 formula the same for everyone?

It applies to employees covered by the Payment of Gratuity Act. Employees not covered, or government employees, may have a different basis. Verify your case with a professional.

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