The practice manager at a clinic in Indore is leaving after seven and a half years. Her last drawn Basic plus DA is ₹38,400 a month. The clinic has 14 staff, so gratuity law covers it (the Code on Social Security since November 2025, and the Payment of Gratuity Act before it), and the owner wants to know what the cheque should say before the farewell lunch.
The gratuity calculation formula
Gratuity = last drawn monthly Basic plus DA × 15 ÷ 26 × years of service.
The 15 is fifteen days' wages for each year. The 26 is the working days in a month, which is why the result is a little more than half a month's pay per year. Years are completed years, and a final part-year of six months or more counts as a full one.
For the practice manager: she joined on 10 Jan 2019 and leaves on 18 Sep 2026. That's 7 years and 254 days, so 8 years count. ₹38,400 × 15 ÷ 26 × 8 = ₹1,77,231.
| Service | Years counted | Gratuity |
|---|
| Exactly five years | 5 | ₹1,10,769 |
|---|
| Four years 275 days, strict rule | Not eligible | ₹0 |
|---|
| Four years 275 days, 240-day rule | 5 | ₹1,10,769 |
|---|
| Seven years 254 days | 8 | ₹1,77,231 |
|---|
All four rows are on the same ₹38,400, from the engine behind our gratuity calculator. An employer outside the Act that pays gratuity under its own policy usually uses 15/30 and counts completed years only, so the same seven years and 254 days would come to ₹1,34,400 there.
Gratuity eligibility: 5 years, with three exceptions
The rule is five years of continuous service with an employer the Act covers, which is any shop, office or factory with ten or more employees. Once an establishment is covered, it stays covered even if headcount later drops below ten.
- Death or disablement. The five-year condition doesn't apply. Gratuity goes to the nominee, or to the employee.
- Fixed-term employees. Under the Code on Social Security, in force since 21 November 2025, somebody on a fixed-term contract earns gratuity after one year, in proportion to the time served.
- Four years and 240 days. The contested one, below.
Gratuity for 4 years 240 days
Continuous service in the Act is defined partly by days worked, and 240 days is the test for a year. The Madras High Court read that to mean four years plus 240 days in the fifth counts as five (Mettur Beardsell Ltd. v. Regional Labour Commissioner, 1998). Other courts have held out for the full five years, so the question isn't settled across India.
So it's the employer's call. Many pay, because the amount is the same as a five-year gratuity and the dispute costs more than the cheque. Whichever way you go, apply it to everyone and write it into your policy. Facto Lite has a setting for it.
Since the labour codes, the Basic you set may not be the wage
The codes define wages so that allowances above half of total pay are added back. That matters for gratuity. Take a ₹64,000 gross with Basic set at ₹22,400, which is 35% of it. The wage for gratuity becomes ₹32,000, and seven years and 254 days pay ₹1,47,692 instead of ₹1,03,385.
Where this lands on an owner: the gratuity provision in most CTC sheets is still worked out on Basic. If Basic is under half of pay, the provision has been too small every month, and the gap shows up at the first long-service exit.
Gratuity tax exemption limit
For a private-sector employee covered by the Act, gratuity is tax-free up to ₹20 lakh. That's a lifetime limit across every employer, so somebody who was paid gratuity in an earlier job has less of it left. Anything above the limit is taxed as salary. The same ₹20 lakh is also the most the Act makes an employer pay, though you can pay more.
Who pays gratuity, and when
The employer pays it, from its own money or through a group gratuity policy with an insurer. It's never deducted from salary. Many offer letters include it in CTC as a provision of about 4.81% of Basic, which is why the monthly gross is lower than CTC ÷ 12; there's more on that in CTC to in-hand salary.
It's due within thirty days of the last working day, and interest runs after that. In practice it goes out with the rest of the full and final settlement.
Gratuity rules for private employees, in short
- Ten or more employees brings you under the Act.
- Five years of service, or one for fixed-term staff.
- 15/26 of the last Basic plus DA for each year, with six months rounding up.
- Paid within 30 days, and capped at ₹20 lakh.
