Gratuity: the 15/26 formula and the six-month rule

Gratuity is one of the few things in Indian salary law with a formula simple enough to do on paper, and it still catches people out — usually on the rounding, occasionally on the definition of salary, and reliably on the assumption that it is tax free.

The formula

For an employee covered by the Payment of Gratuity Act, the amount is fifteen days of pay for every completed year of service, where a month is treated as twenty-six working days.

The 15/26 is not arbitrary. It treats a month as twenty-six working days rather than thirty, on the reasoning that Sundays are not working days, so half a month's pay is fifteen twenty-sixths rather than half.

The rounding rule people get wrong

Service is counted in completed years, and the part-year at the end is rounded — but not the way you would expect. Six months or more rounds up to a full year. Anything less is discarded entirely.

The first two rows are one month apart and differ by a full year of gratuity. On a basic of ₹80,000 a month that single month is worth about ₹46,000. If you are resigning close to a half-year mark, the date is worth checking before you name it.

The last row is the harsher one. Five years of continuous service is the qualifying threshold, and four years and eleven months qualifies for nothing. The exception is death or disablement, where the qualifying period does not apply.

The tax treatment is not what most people assume

Gratuity is exempt under section 10(10), but the exemption is capped, and the cap is a lifetime limit rather than a per-employer one. Amounts above it are taxable as salary at your slab rate.

That lifetime framing matters for anyone who has received gratuity before. The exemption you used at a previous employer reduces what remains available now — it does not reset with each job.

• Government employees receive gratuity fully exempt, without the cap.
• For everyone else covered by the Act, the exemption is the least of the statutory cap, the actual gratuity received, or the amount the formula produces.
• Employees not covered by the Act have a different formula — fifteen days on a thirty-day month, using average salary over the preceding ten months.

What counts as continuous service

Continuous service is not broken by leave, sickness, an accident, a lawful strike, or a lay-off. It is a specific statutory concept rather than a matter of whether you were physically present, and employers occasionally get this wrong in your favour or against it.

Note also that gratuity is frequently included in your CTC, where it inflates the headline figure by an amount you only receive if you stay five years — see CTC versus in-hand.