Gratuity Calculation Formula in India: 15/26 Rule, Covered vs Non-Covered & ₹20L Tax Exemption
The complete quantitative guide to gratuity calculation under the Payment of Gratuity Act 1972. Master the 15/26 formula, rounding-off service rules, ₹20 Lakh tax exemption under Section 10(10), and step-by-step corporate payout examples.
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The 15/26 Payment of Gratuity Formula
Applies to all factories, mines, ports, and establishments with 10+ employees. Month is taken as 26 working days (excluding 4 Sundays). Any tenure fraction exceeding 6 months is rounded UP to the next full year!
Month is taken as 30 calendar days. Only fully completed years are counted (no rounding up for fractions of a year). Salary is averaged over the last 10 months preceding retirement.
1. What Components Count as "Salary" for Gratuity?
Many employees believe gratuity is calculated on total Cost to Company (CTC) or gross in-hand pay. Under Section 2(s) of the Payment of Gratuity Act, 1972:
• INCLUDED: Fixed Dearness Allowance (DA) if forming part of retirement benefits.
2. Step-by-Step Gratuity Payout Across Service Tenures
Assuming an employee has a last-drawn Basic Salary of ₹1,20,000 per month under an establishment covered under the Act:
| Completed Service Tenure | Rounded Years Counted | 15/26 Formula Computation | Total Gratuity Payable | Taxability under Section 10(10) |
|---|---|---|---|---|
| 4 Years 11 Months | 0 Years (Ineligible) | - | ₹0 (Breaches 5-Year Rule) | Not eligible |
| 5 Years Exactly | 5 Years | (15 × ₹1,20,000 × 5) / 26 | ₹3,46,154 | 100% Tax-Free |
| 10 Years 7 Months | 11 Years (Rounded UP) | (15 × ₹1,20,000 × 11) / 26 | ₹7,61,538 | 100% Tax-Free |
| 20 Years | 20 Years | (15 × ₹1,20,000 × 20) / 26 | ₹13,84,615 | 100% Tax-Free |
| 30 Years | 30 Years | (15 × ₹1,20,000 × 30) / 26 | ₹20,76,923 | ₹20L Tax-Free; ₹76,923 Taxed at Slab |
Exceptions to the 5-Year Continuous Service Rule
Under Section 4(1) of the Act, completing 5 years of continuous service is mandatory to qualify for gratuity, EXCEPT in the following three situations:
- Death of the Employee: Gratuity is paid immediately to legal heirs/nominees regardless of tenure (even if service was only 3 months).
- Permanent Disablement: If the employee suffers total disablement due to accident or occupational illness.
- Fixed-Term Employment: Under the Industrial Relations Code, fixed-term workers are eligible on a pro-rata basis for each completed year.
Compute Your Exact Gratuity & Tax
Use our statutory calculator to compute your exact payout under the 15/26 formula and check your Section 10(10) tax exemption.
Frequently Asked Questions (FAQs)
Can an employer pay more than the ₹20 Lakh gratuity ceiling?
Yes. The ₹20 Lakh figure is a tax exemption ceiling, not an employer payout cap. If an employer's company policy or contractual agreement provides for higher gratuity, the employer can pay ₹30 Lakhs or more; however, any amount exceeding ₹20 Lakhs will be added to your salary and taxed at your marginal slab rate.
Does gratuity lapse if an employee is terminated?
Under Section 4(6), gratuity can be forfeited only if the employee was terminated for riotous/disorderly conduct, violence, or moral turpitude, or for an act causing financial damage (gratuity can be forfeited only to the extent of the actual monetary damage caused). In ordinary terminations or layoffs, gratuity is strictly mandatory!