The Payment of Gratuity Act 1972 entitles eligible employees to a lump sum payment from their employer upon completing at least 5 years of continuous service, paid at the time of retirement, resignation, death, or disablement. Gratuity eligibility and calculation are among the most commonly misunderstood parts of Indian compensation, since the payout depends on specific service duration and salary figures rather than a flat, universal amount.
Gratuity eligibility conditions
Minimum 5 years of continuous service, generally required before gratuity becomes payable, except in cases of death or disablement, where the minimum service requirement is waived.
Applicability to establishments employing 10 or more employees, covering factories, mines, plantations, ports, and shops or establishments as defined under the Act.
Continuous service is defined specifically under the Act, and certain interruptions — approved leave, for instance — don't necessarily break continuity for eligibility purposes.
How gratuity is calculated
The standard formula is: (Last drawn basic salary + DA) × 15/26 × number of years of service. The figure 15/26 represents 15 days' wages for every completed year of service, calculated using a 26-day working month convention. Any service period of more than 6 months in the final year is typically rounded up to a full year for calculation purposes.
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Example gratuity calculation
An employee with a last drawn basic salary plus DA of ₹40,000, after 10 years of service, would receive: ₹40,000 × 15/26 × 10 = approximately ₹2,30,769, though the Act also sets a maximum gratuity ceiling that applies regardless of the calculated figure exceeding it.
Tax treatment of gratuity
Gratuity received by government employees is fully tax-exempt. For private-sector employees covered under the Act, exemption applies up to a specified ceiling, with amounts above that ceiling taxable as income — checking the current exemption limit against the latest Income Tax provisions is worth doing before assuming a specific figure. Accurate service duration tracking through HR management software also matters for getting this calculation right.
Where OfficePortal fits
OfficePortal's payroll software can be configured to track service duration and calculate gratuity liability accurately as part of full and final settlement, reducing the manual calculation risk for manufacturing and hospitality businesses managing employee exits regularly.
About the author
Kannan Chandrasekaran
Director@Awarious
Kannan Chandrasekaran is a Director and HR technology professional with expertise in HRMS, payroll, workforce management, and digital transformation. He shares practical insights to help businesses simplify and improve their HR operations.
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