Gratuity calculation formula in India: 15/26, the 240-day rule and seven common mistakes

Gratuity is usually the biggest single line in a full and final settlement, and it is the one most often worked out by hand on a spreadsheet the night before. The gratuity calculation formula in India is short. The arguments are all about the inputs: which wage, how many years, and whether someone just short of five years qualifies.

Where the gratuity rules live now

Since 21 November 2025, gratuity is governed by Chapter V of the Code on Social Security (sections 53 to 58), which replaced the Payment of Gratuity Act. Most of the old rules carried over. Gratuity applies to establishments with ten or more employees.

It is payable on leaving after five years of continuous service: on resignation, retirement, retrenchment, death or disablement. For death or disablement, there is no minimum service.

The gratuity calculation formula, India's 15/26 rule

For an establishment covered by the law:

Gratuity = last drawn monthly wage × 15 ÷ 26 × completed years of service

• 15 is fifteen days' wages for each year.
• 26 is the number of working days the law assumes in a month.
• A part year of more than six months counts as a full year.

Anil, a machine operator in Pune, joined on 3 March 2019 and left on 15 September 2026. That is 7 years, 6 months and 13 days, so 8 years for gratuity. His last basic plus DA was ₹26,000.

₹26,000 × 15 ÷ 26 × 8 = ₹1,20,000.

Companies may pay more, for example 30 days a year. They may not pay less than 15/26.

Gratuity 4 years 240 days: does it count as five?

Section 54 treats a person as being in continuous service for a year if they actually worked 240 days in the 12 months before the date in question, or 190 days below ground in a mine or in an establishment that works less than six days a week. Lay-off, paid leave, accident leave and up to 26 weeks of maternity leave count as days worked. The Supreme Court has also read "actually worked" to include paid weekly offs and holidays.

The live question is whether 4 years plus 240 days in the fifth year counts as five years. The courts are split:

• Yes: the Madras, Kerala, Delhi, and Punjab and Haryana High Courts.
• No: the Karnataka High Court, in two 2022 decisions.
• Not decided: the Supreme Court.

In practice, controlling authorities mostly follow the employee-friendly view. Unless your establishment is in Karnataka and your lawyer advises otherwise, paying is the lower-risk choice.

One related detail: count the last working day. The employee was in service and worked that day. Joining on 1 January 2022 and leaving on 28 August 2026 gives exactly 4 years and 240 days if you count both ends, and 239 days if you do not. No court has ruled on this exact point, but the inclusive count is the natural reading.

Gratuity for fixed term employees

Fixed-term employees now get gratuity pro rata when their term ends. The Labour Ministry and PIB describe this as applying after one year of service. The Code itself says only "pro rata", and one reading is that there is no gratuity below a year. Most companies follow the one-year line.

For a contractor at a Gurugram site on a 20-month fixed-term contract at ₹21,000 a month, that is ₹21,000 × 15 ÷ 26 × 2 = ₹24,231, because 20 months is 1 year and 8 months, and the 8 months round up.

Gratuity ₹20 lakh limit, and the tax side

The payment cap is ₹20 lakh. In August 2026 the Labour Ministry confirmed that the ₹20 lakh figure continues under the Code. A company can pay more as a goodwill amount, but the excess is taxable.

On tax, for private-sector employees covered by the law, the exemption is the least of:

• the formula amount (15/26 of the last wage per year of service),
• the amount actually received,
• ₹20 lakh, counted over the person's lifetime across employers.

For employers not covered by the law, the exempt limit is half a month's average salary (over the ten months before exit) for each completed year. Gratuity paid to the family on a death in service is not taxable at all.

Gratuity on rehire

Someone leaves after three years, comes back a year later and works three more. Do they reach five?

Section 54 lists what does not break service: sickness, leave, lay-off, strikes, unauthorised absence without a break order, and stoppages that are not the employee's fault. An accepted, settled resignation is not on the list. So a genuine resignation followed by a fresh appointment usually starts a new count. Service does continue if the resignation was withdrawn before acceptance, or the move was a transfer within the group without fresh recruitment.

The Supreme Court confirmed in December 2025 that someone who resigns after five years keeps their gratuity; resignation does not forfeit it.

On rehire, write the decision into the new appointment letter: "fresh appointment, earlier service not counted", or "continuity of service from (date) preserved".

Seven common mistakes

1. Dividing by 30. The law uses 26. 15/30 pays less than the statutory minimum.
2. Ignoring the part year. Seven years and seven months is eight years.
3. Refusing at 4 years 240 days outside Karnataka without advice.
4. Leaving out the last working day.
5. Forgetting fixed-term staff after one year.
6. Using an old wage base. Under the Codes, the 50% rule can push allowances back into "wages", which raises gratuity. See the 50% wage rule post.
7. Paying late. Gratuity has its own 30-day window; final wages have two working days. See PF on a late full and final settlement for the rest of the exit timeline.

If you run a year-end provision for gratuity or leave, the accounting rules around actuarial valuation apply to both; we cover the leave side in the leave encashment provision post.

Vatsin Payroll works out gratuity in the F&F with 15/26 as the floor, counts the last working day, treats a part year above six months as a full year, and keeps the 4 years 240 days rule as a setting, so a Karnataka establishment can choose the stricter reading with its eyes open.