How gratuity is calculated
Under the Payment of Gratuity Act, an employee who completes five years of continuous service is entitled to gratuity on leaving, retiring or being retrenched; the five-year condition is waived on death or disablement. The amount is fifteen days' wages for every completed year of service, where a month is treated as 26 working days. Wages means the last drawn basic pay plus dearness allowance. Service of six months or more in the final year counts as a full year, so 7 years and 7 months is treated as 8 years.
The statutory maximum is ₹20 lakh, which is also the tax-exempt limit for employees covered by the Act. Employers must pay within 30 days of gratuity becoming due. Many companies provision 4.81% of basic every month towards gratuity, which is 15 ÷ 26 ÷ 12 expressed as a percentage, and show it inside CTC.
- Eligibility: 5 years of continuous service (not required on death or disablement)
- Formula: (Basic + DA) × 15 ÷ 26 × completed years
- Six months or more in the last year rounds up to a full year
- Ceiling: ₹20 lakh; tax-exempt up to the same limit for covered employees
Gratuity for contract, security and fixed-term staff
Security guards and housekeeping staff supplied by an agency are the agency's employees for gratuity, and agencies that keep guards for five years or more must pay it. Because deployments move between client sites, continuity of service with the agency is what counts, not continuity at one site. The Labour Codes provide for gratuity to fixed-term employees on a pro-rata basis after one year, with rules being notified; watch state notifications before relying on it.