Comprehensive Guide • Taxation & Salary

How Gratuity is Calculated Under the 15/26 Rule

✍️ Author: AG World Tools Editorial Team ⚖️ Reviewed by: Verified by AG World Tools Technical & Financial Review Board 📅 Last Reviewed: 2026-11-01

Gratuity is a statutory monetary benefit paid by an employer to an employee for continuous service of five or more years, calculated using the formula $\text{Gratuity} = \frac{15 \times \text{Last Drawn Basic Salary + DA} \times \text{Completed Years}}{26}$. In this formula, a working month is legally defined as 26 days (excluding four Sundays), and the employee receives 15 days of salary for every full year of service.

The Payment of Gratuity Act, 1972 mandates this benefit for any private or public commercial establishment employing 10 or more people.

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The Statutory 15/26 Formula

$$\text{Gratuity} = \frac{15 \times (\text{Basic Salary} + \text{Dearness Allowance}) \times \text{Years of Service}}{26}$$

  • Last Drawn Salary: The sum of Basic Salary and Dearness Allowance (DA) received in the final month of employment. Special allowances, HRA, performance bonuses, and travel reimbursements are strictly excluded.

  • Working Days in a Month: Fixed at 26 days by law.

  • Years of Service: Full completed years. If an employee works more than 6 months into an additional year (e.g., 7 years and 7 months), it is rounded up to the next full year (8 years). If less than 6 months (e.g., 7 years and 4 months), it is truncated to 7 years.

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    Step-by-Step Worked Example

    Assume a software engineer resigns after 9 years and 8 months of continuous service:

  • Last Drawn Monthly Basic Salary: ₹80,000

  • Dearness Allowance (DA): ₹0 (standard for private corporate contracts)

  • Tenure: 9 years and 8 months → rounded to 10 completed years (since 8 months $\ge$ 6 months).

    • 1. Daily Wage Equivalent

    $$\text{Daily Wage} = \frac{₹80,000}{26} = ₹3,076.92$$

    2. 15 Days of Salary per Year

    $$\text{15 Days' Pay} = ₹3,076.92 \times 15 = ₹46,153.85$$

    3. Total Gratuity Payable (10 Years)

    $$\text{Gratuity} = ₹46,153.85 \times 10 = \mathbf{₹4,61,538}$$

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    Statutory Eligibility Rules

  • 5-Year Continuous Rule: An employee must complete at least 5 continuous years with the same organization to qualify for gratuity upon resignation or retirement.
  • Exceptions to 5 Years: The 5-year requirement is waived if separation occurs due to death or permanent disablement of the employee; in such cases, gratuity is disbursed immediately to legal heirs.

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    Income Tax Exemption Limits (Section 10(10))

    Under Section 10(10) of the Income-tax Act:
    1. Government Employees: Entire gratuity received is 100% tax-free without ceiling.
    2. Private Sector Employees (Covered under Gratuity Act): The least of the following three amounts is completely exempt from income tax:

  • Statutory ceiling limit of ₹20,00,000 (₹20 Lakh).

  • Actual gratuity received from employer.

  • Eligible amount calculated as per the 15/26 formula.

    • 3. Any gratuity received exceeding ₹20 Lakh is added to taxable salary and taxed at normal slab rates.

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    Frequently Asked Questions

    Can an employer refuse to pay gratuity?

    No. An employer cannot withhold or forfeit gratuity except in narrowly defined instances of dismissal due to moral turpitude or willful damage to the employer's property, and only to the extent of actual proven financial damage.

    Does an internship count toward the 5 years?

    No. Training periods or stipendiary internships typically do not count toward continuous service unless the employment contract formally recognized the individual as a permanent full-time employee.

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    Official Sources & Statutory References