Payment of Gratuity Act 1972: Statutory Legal Framework
Gratuity is a statutory monetary reward mandated by Indian law for employees who have rendered continuous service in an establishment with 10 or more employees:
| Rule / Parameter | Covered under Act | Not Covered under Act |
|---|---|---|
| Working Days in Month | 26 Days (excludes 4 Sundays) | 30 Calendar Days |
| Statutory Formula | (15 × Basic × Yrs) ÷ 26 | (15 × Basic × Yrs) ÷ 30 |
| Rounding of Final Year | > 6 months rounded up to 1 yr | Only fully completed years |
| Minimum Service Required | 5 Continuous Years (Except death) | 5 Continuous Years |
| Tax Exemption (Sec 10(10)) | Up to ₹20,00,000 (Lifetime) | Up to ₹20,00,000 (Lifetime) |
Why Does the Formula Divide by 26 Instead of 30?
In landmark judgments, the Supreme Court of India upheld that for monthly-salaried employees, a month consists of 26 working days after discounting 4 weekly off days (Sundays). Thus, your one day's wage is computed as (Basic Salary + DA) ÷ 26.
Under the Act, an employee receives 15 days of wages for every completed year of service. Multiplying 15 by one day's wage results in the classic 15/26 formula:
Frequently Asked Questions
If I complete 4 years and 8 months, am I eligible for gratuity? ▼
Under strict interpretation of Section 4(1), an employee must complete 5 full years. However, several High Courts (such as Madras HC) have ruled that completing 240 days in the 5th year fulfills continuous service requirements. Nonetheless, most corporate HR departments mandate completion of exactly 4 years and 10.8 months (or 5 full years) to sanction gratuity.
Is HRA or Special Allowance included in the gratuity calculation? ▼
No. The Payment of Gratuity Act explicitly defines "wages" as Basic Salary plus Dearness Allowance (DA). Allowances such as HRA, Special Allowance, conveyance, medical reimbursement, performance bonus, and commission are legally excluded from gratuity computations.
Can an employer pay more than ₹20 Lakh gratuity? ▼
Yes. Section 4(5) states that nothing in the Act prohibits an employee from receiving better terms of gratuity under any award, agreement, or company contract. However, any amount received above ₹20 Lakh will be added to your taxable income and taxed at your applicable income tax slab rate.