The formula
Gratuity = last drawn monthly wages × 15 ÷ 26 × years of service
Wages are basic plus DA, plus any allowances above 50% of total pay under the Labour Codes. A part year of more than six months counts as a full year.
Example
Wages ₹40,000 a month, service of 7 years 8 months (counted as 8 years): 40,000 × 15 ÷ 26 × 8 = ₹1,84,615.
Who is eligible
- Employees with at least five years of continuous service, when they resign, retire or are let go.
- Many employers and courts treat 4 years and 240 days as five years for this purpose.
- Fixed-term employees are eligible after one year under the Code on Social Security.
- On death or disablement, the five-year condition does not apply.
Ceiling and tax
Gratuity is capped at ₹20 lakh. For private-sector employees, gratuity up to that limit is generally exempt from income tax.
When it must be paid
Gratuity is due when it becomes payable and should be paid within 30 days; delays attract interest. In practice it is paid with the full and final settlement.
How HR Bingo handles it
In full and final settlement, HR Bingo checks eligibility (including 4 years 240 days, and one year for fixed-term staff), counts more than six months as a year, applies the Labour Code wages rule and the ceiling, and shows how the figure was worked out.
Sources
Frequently asked questions
Is gratuity paid if someone resigns before five years?
Generally no, unless they are a fixed-term employee with at least one year, or the employer treats 4 years and 240 days as five years. On death or disablement it is paid regardless of service.
Why divide by 26?
The formula takes 26 working days in a month, so 15 days' wages is monthly wages × 15 ÷ 26.
What is the maximum gratuity?
₹20 lakh.