How Gratuity Calculation Works Under the Act
Under the Payment of Gratuity Act, 1972, gratuity is a statutory reward provided to an employee for continuous service. For employers with 10 or more employees, a month is legally defined as having 26 working days (excluding Sundays). Gratuity is computed as 15 days of the last drawn basic salary for every completed year of service: (15 × Basic × Tenure) / 26.
The 6-Month Rounding Rule
If the final fraction of your tenure exceeds 6 months (e.g., 8 years and 7 months), it is rounded up to the next whole year (counted as 9 years). If the fraction is 6 months or fewer (e.g., 8 years and 4 months), it is rounded down to 8 years.
Frequently Asked Questions
What is the maximum tax-free gratuity limit for private employees?
Under Section 10(10), the lifetime tax-free gratuity ceiling for non-government employees is ₹20,00,000. Any amount paid by the employer exceeding ₹20 Lakhs is added to taxable salary income.
Does 4.8 years of service qualify for gratuity?
Strictly speaking, the statute mandates 5 continuous years (minimum 240 working days in the 5th year). However, several High Court judgments have held that completing 4 years and 240 days fulfills the continuous service criteria. Confirm with your HR policy.
Does gratuity calculation consider HRA or performance bonuses?
No. Gratuity calculation considers only Basic Pay and Dearness Allowance (DA). Special allowance, HRA, bonuses, and incentives are excluded from the statutory calculation.