Gratuity is a statutory payment for long service under the Payment of Gratuity Act, 1972. The formula is simple. The disputes are about eligibility, what counts as "wages", and the deadline employers forget carries interest.
Who it applies to
The Act covers establishments with 10 or more employees. Once covered, an establishment stays covered even if headcount later falls below 10.
An employee qualifies on termination of employment after five years of continuous service, where termination includes resignation, retirement, superannuation, or death and disablement.
The five-year condition does not apply at all where employment ends due to death or disablement. In those cases gratuity is payable regardless of tenure.
The formula
For establishments covered by the Act:
Gratuity = Last drawn monthly wages × 15/26 × completed years of service
- Wages means basic salary plus dearness allowance. Not HRA, not allowances, not bonus.
- 15/26 represents 15 days' wages for each year, against 26 working days in a month.
- Completed years — a part year of more than six months rounds up; six months or less is dropped.
Worked examples
Example 1. Basic + DA of ₹50,000, service of 8 years 7 months. Service rounds to 9 years.
₹50,000 × 15/26 × 9 = ₹2,59,615
Example 2. Basic + DA of ₹35,000, service of 5 years 4 months. Service rounds to 5 years.
₹35,000 × 15/26 × 5 = ₹1,00,962
Example 3. Basic + DA of ₹80,000, service of 22 years.
₹80,000 × 15/26 × 22 = ₹10,15,385, but the statutory ceiling caps the payment at ₹20,00,000 — not reached here, so the full amount is payable.
Tax treatment
- For employees covered by the Act, gratuity is exempt up to the least of: ₹20,00,000, the amount actually received, or the amount calculated by the statutory formula
- The ₹20 lakh limit is a lifetime limit across all employers, not per job
- Gratuity on death is exempt in the hands of the recipient
Payment deadline and interest
Forfeiture: narrow and specific
Gratuity may be forfeited only in defined circumstances:
- Wholly or partly — where termination was for wilful omission or negligence causing damage or loss to the employer, limited to the extent of that damage
- Wholly — where termination was for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment
Forfeiture requires termination for that reason, with due process. General dissatisfaction, poor performance, or failing to serve notice are not grounds.
Disputes employers commonly lose
- Denying eligibility at four years and eight months
- Calculating on gross salary instead of basic plus DA — this one usually favours the employee, so it is a costing error rather than a legal one, but it still distorts your accruals
- Withholding gratuity against notice period shortfall or asset recovery without a legal basis
- Paying late and ignoring the interest liability
- Not accruing gratuity in the books, then facing a lumpy cash outflow when a long-serving cohort leaves
