Gratuity in India: The 5-Year Rule, the 6-Month Rule, and What You Are Owed

Gratuity is not a bonus your employer chooses to pay. Under the Payment of Gratuity Act, 1972, it is a legal entitlement once you have completed five years of continuous service.

The formula

Gratuity = (15 × last drawn basic+DA × completed years) ÷ 26

Fifteen days of wages for every completed year, on a 26-day month. The 26 assumes Sundays are unpaid, which makes each working day worth slightly more — that is deliberate and it favours you.

Worked example. Last drawn basic plus DA of ₹50,000 a month, seven years and seven months of service:

(15 × 50,000 × 8) ÷ 26 = ₹2,30,769

Rule one: the six-month rounding

Seven years and seven months counted as eight years.

Service beyond six months in the final year rounds up to a complete year. Exactly six months or less is dropped. On ₹50,000 basic, that rounding is worth ₹28,846.

Read that again if you are planning a resignation. Leaving at seven years and five months instead of seven years and seven months costs you ₹28,846 for the sake of two months.

Rule two: five years, or nothing

Four years and eleven months earns zero. There is no partial gratuity, no pro-rata, nothing.

You will find advice online that four years and 240 days qualifies, on the reasoning that 240 days constitutes a year of continuous service under the Act. Courts have accepted this in some cases. It is not applied uniformly, it depends on your establishment and jurisdiction, and your employer is under no obligation to agree without a fight.

Do not plan a resignation around it. If you are at four years and eight months with an offer in hand, the four months are worth more than they look.

The five-year condition is waived entirely if service ends because of death or disablement.

It is calculated on basic, not gross

This is where estimates go wrong most often. Gratuity uses last drawn basic plus dearness allowance only — not HRA, not special allowance, not conveyance, not bonuses.

On a ₹1,00,000 monthly gross with ₹40,000 basic, gratuity is calculated on ₹40,000. Someone assuming it uses gross will estimate two and a half times what they actually receive.

Tax: the ₹20 lakh cap is a lifetime ceiling

Gratuity is exempt up to ₹20,00,000 for non-government employees, with anything above taxed as salary.

Two things people miss:

• The cap is a lifetime limit across all employers, not per job. Receive ₹8 lakh exempt at one company and only ₹12 lakh of exemption remains for the rest of your career.
• An employer may pay more than the formula produces — the Act sets a floor, not a ceiling. Anything above the statutory amount is taxable regardless of the ₹20 lakh cap.

Who is covered

The Act applies to establishments with ten or more employees, and once covered an establishment stays covered even if headcount later falls below ten.

If your employer is outside the Act, gratuity may still be payable under your contract — but the divisor is usually 30 rather than 26, which reduces the payout by about 15%, and the exemption is computed differently. Your appointment letter governs.

Before you resign

Check three dates in the same afternoon: your joining date, today, and the date at which your next completed year or six-month threshold falls. Run the numbers on the gratuity calculator. Then decide.

Two months of patience is occasionally worth ₹28,846.