Gratuity Act Eligibility and Calculation: What Employees Are Actually Entitled To
The "5 years of continuous service" rule for gratuity eligibility has genuine exceptions most employees don't know about — and the calculation formula itself relies on a specific, legally defined meaning of "last drawn salary" that differs from what many employees assume it means.
The core eligibility rule
Under the Payment of Gratuity Act, 1972, an employee becomes eligible for gratuity upon completing 5 years of continuous service with the employer — payable on the employee's resignation, retirement, or termination (other than for specified misconduct). The 5-year requirement is the default eligibility threshold most employees are broadly aware of.
The exceptions to the 5-year rule
What counts as "continuous service"
Continuous service is a specifically defined concept under the Act, generally counting uninterrupted service including periods of authorised leave, sickness, or accident, and does not necessarily get broken by short gaps for such reasons — an employee should not assume a period of medical leave or other authorised absence automatically resets or breaks the continuity of their service for gratuity eligibility purposes.
The calculation formula
The standard gratuity calculation formula (for employees covered under the Act) is:
Gratuity = (Last drawn salary × 15 × number of years of service) / 26
Where "last drawn salary" specifically means basic salary plus dearness allowance (not the full gross salary including all other allowances and components) — this is a specific, defined meaning under the Act, and using an employee's full gross monthly salary instead of just basic-plus-DA in this formula will produce an incorrect, overstated figure. The 26 in the denominator represents the number of working days typically considered in a month for this calculation, and any period of service exceeding 6 months in the final year is generally rounded up to a full year for calculation purposes.
The tax exemption ceiling
Gratuity received is exempt from income tax up to a specified ceiling amount under Section 10(10) of the Income Tax Act — this ceiling has been revised upward over time, so an employee should confirm the currently applicable exemption limit rather than relying on an outdated figure, particularly for employees receiving larger gratuity payouts where the exemption ceiling can meaningfully affect their actual take-home amount versus what becomes taxable income.
Employer's obligation and payment timeline
The employer is generally required to determine and pay gratuity within a specified period after it becomes payable — an employer's delay or refusal to pay legitimately due gratuity can be pursued through the controlling authority designated under the Act, which has powers to direct payment along with applicable interest for delayed payment.
Practical guidance for employees checking their entitlement
Confirm your actual basic-plus-DA component (not gross salary) when estimating your gratuity entitlement, keep documentation of your continuous service period (including any authorised leave periods that shouldn't break continuity), and be aware of the death/disablement exception if the standard 5-year threshold hasn't been met but one of those triggering circumstances applies.