Six Months and One Day Can Be Worth a Full Year of Gratuity
The rounding rule in the Act is the single largest lever most employees have over their gratuity, and it is entirely a question of resignation timing.
The formula, and what counts as salary
For an employer covered by the Act, gratuity is fifteen days of pay for every completed year of service, where a month is treated as twenty-six working days.
Payment of Gratuity Act, 1972
Gratuity = 15 × (Last drawn Basic + DA) × Years ÷ 26
- Only Basic and Dearness Allowance count — not HRA, bonuses or other allowances
- Employers outside the Act use ÷ 30 and a ten-month average salary
The salary component catches people out. Gratuity is calculated on Basic plus DA, not on total CTC. Where an employer structures a package with a low basic and large allowances, the gratuity entitlement is correspondingly small.
The rounding rule
Under the Act, a part-year of more than six months counts as a full year. Six months or fewer is discarded entirely.
The practical consequence: leaving at ten years and seven months pays the same as eleven full years, while leaving at ten years and six months pays as ten. On a ₹50,000 basic that one-month difference is worth close to ₹29,000.
Employers outside the Act are not bound by this rounding, which is why the toggle above changes the answer as much as it does.
The five-year cliff
Gratuity requires five years of continuous service. At four years and eleven months the statutory entitlement is zero — there is no partial accrual and no pro-rating.
The rule is waived if service ends through death or permanent disablement, in which case gratuity is payable regardless of tenure. Some employers pay gratuity voluntarily before five years; that payment is fully taxable, because the statutory exemption does not apply to it.
Tax treatment
For non-government employees covered by the Act, gratuity is exempt up to a ceiling that applies across your entire career, not per employer. Someone who received exempt gratuity at a previous job has correspondingly less headroom at the next.
Anything above the ceiling is taxable as salary income in the year received. Government employees receive gratuity fully exempt.