Gratuity is a statutory retirement benefit that every employee completing five or more years of continuous service with a covered employer is legally entitled to under the Payment of Gratuity Act 1972. This guide covers the exact calculation formula, the six-month rounding rule that can make you eligible before completing exactly 5 years, the ₹20 lakh tax-free limit, and your rights when an employer delays or disputes payment. ## Coverage and the Two Formulas The Act covers establishments employing 10+ persons in factories, mines, plantations, ports, railway companies, and shops or establishments. Once covered, establishments remain covered permanently even if headcount later falls below 10. Covered establishments (26-day divisor): Gratuity = (Last drawn monthly salary / 26) x 15 x Completed years of service. Non-covered establishments (30-day divisor, voluntary): Gratuity = (Last drawn monthly salary / 30) x 15 x Years. Using 26 instead of 30 gives 15.4% higher gratuity. For ₹60,000 final salary and 20 years: 26-day formula = ₹6,92,308; 30-day formula = ₹6,00,000 — a ₹92,308 difference. ## Salary Definition — Only Basic + DA The most common calculation error: using total salary instead of just Basic + DA. The Act specifies only Basic Salary and Dearness Allowance. Excluded regardless of size: HRA, conveyance, medical, special allowance, performance bonus, commission, and all other allowances. For an employee with ₹30,000 basic out of ₹80,000 total monthly package: Gratuity per year = (₹30,000/26) x 15 = ₹17,308. After 10 years: ₹1,73,077 — not ₹4,61,538 based on total salary. ## The Six-Month Rounding Rule Service beyond six months in the final year rounds up to one full year. Employee completing 4 years and 7 months: service = 5 years (eligible — 7 months rounds up to 1 year). Employee completing 4 years and 5 months: service = 4 years (ineligible — 5 months does not round up). This rule has been upheld by courts including the Supreme Court. ## Tax Treatment and Claiming Your Gratuity For covered establishment employees: gratuity up to ₹20 lakh is completely tax-free. Since the Act's maximum is also ₹20 lakh, all gratuity from covered employers is effectively tax-exempt. The ₹20 lakh is a lifetime aggregate across all employers. If employer fails to pay without reasonable cause: file a complaint with the Controlling Authority (Regional Labour Commissioner) — free of charge. They can order payment with 10% per annum interest on delayed amounts.