How to Calculate Gratuity using the 15/26 Formula

Gratuity is a statutory right under the Payment of Gratuity Act, 1972, serving as a financial thank-you to employees who have rendered long-term service. But how exactly is it calculated?

The 5-Year Eligibility Rule

An employee becomes eligible for gratuity only after completing 5 years of continuous service with the same employer. However, legally, "continuous service" of 4 years and 240 days (approx. 4 years and 8 months) is rounded up to 5 years.

The 15/26 Formula Explained

For employees covered under the Act, the formula is:

Gratuity = (15 / 26) × Last Drawn Basic Salary × Number of Years of Service

• 15: Represents 15 days of wages for every completed year of service.
• 26: Represents the number of working days in a month (30 days minus 4 Sundays). This increases the per-day wage calculation compared to dividing by 30.
• Rounding: Service of more than 6 months is rounded up to the next full year. (e.g., 5 years and 7 months is treated as 6 years).

The Statutory Ceiling

As per the latest amendments, the maximum gratuity amount payable is tax-exempt up to ₹ 20,00,000 (20 Lakhs). Any amount paid above this ceiling is fully taxable in the hands of the employee.