Detailed Eligibility & The 5-Year Rule
Under the Payment of Gratuity Act 1972, an employee is eligible for gratuity if they have rendered "continuous service" for at least 5 years. However, there are critical nuances to this rule:
- Continuous Service: This includes days of leave, sickness, or temporary disablement.
- The 240-Day Rule: If an employee completes 4 years and 240 days (or 190 days in certain sectors), they are often considered to have completed the 5th year for gratuity purposes.
- Death or Disablement: The 5-year requirement is waived in cases of death or disablement due to accident or disease.
The 15/26 Calculation Formula
The standard formula used to calculate gratuity for employees covered under the Act is:
Step-by-Step Calculation Example
Let's assume an employee, Ramesh, worked for 12 years and his last drawn basic salary (including DA) was ?60,000.
- Identify Components: Basic + DA = ?60,000.
- Calculate 15 days salary: (60,000 / 26) * 15 = ?34,615.
- Multiply by Tenure: 34,615 * 12 years = ?4,15,380.
Taxation & Exemptions (Section 10(10))
Gratuity is a retirement benefit and enjoys significant tax exemptions under the Income Tax Act:
- Government Employees: Entire gratuity amount received is tax-exempt.
- Private Sector: Tax exemption is the least of: Actual gratuity received, ?20,00,000 (Statutory limit), or 15 days' salary for every completed year of service.
Nomination & Payment Timeline
Every employee who has completed one year of service must make a nomination (Form F) to ensure the gratuity is paid to their legal heirs in case of death. Employers are legally bound to pay the gratuity within 30 days from the date it becomes payable.
🚨 Common HR Pitfalls (How Employees Get Underpaid)
Corporate HR departments frequently make mistakes when calculating final settlements. Here is what you need to double-check:
- Ignoring the 240-Day Precedent: Many HR systems automatically reject gratuity if the tenure reads "4.8 years". Do not accept this. Cite the Madras High Court precedent establishing that 4 years and 240 days qualifies as 5 continuous years.
- Excluding Dearness Allowance (DA): Some employers maliciously calculate the 15/26 formula using only Basic Salary. The law explicitly requires Basic Salary plus Dearness Allowance to be used as the base multiplier.
- Delayed Payment Interest: If your employer delays the gratuity payout beyond 30 days of your last working day, you are legally entitled to receive simple interest (currently around 10% per annum) on the delayed amount.
Authentic FAQ
How do I calculate severance pay or gratuity in India?
What is the 4 year and 240 days rule?
Is gratuity taxable in India?
1 Enter Your Employment Details
Basic Salary only — exclude allowances
Decimals allowed (e.g. 3.5 years)
Required for UK and age-based calculations
Legal Basis & Formula
Editorial Standards & Formula Verification Policy
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