What gratuity is
Gratuity is a statutory payment under the Payment of Gratuity Act to an employee who leaves after at least five years of continuous service (the Act prescribes circumstances where the five-year condition does not apply).
It is calculated as fifteen days' wages for every completed year of service, where the daily wage is the last drawn basic pay plus dearness allowance divided by twenty-six: Gratuity = 15 ÷ 26 × last drawn basic and DA × completed years.
Why it matters
Gratuity is a liability that grows every year an employee stays, and it is paid in one amount at exit. Employers that do not provision for it meet it as a surprise in the final settlement.
Common challenges
Continuous service
Breaks, transfers between entities and periods of leave raise questions about what counts.
The wage base
Gratuity is calculated on last drawn basic and DA, not gross.
Unfunded liability
Without provisioning, a long-serving exit lands as an unplanned cost.
The process, step by step
- 1
Track service from the original joining date
Carry the date across transfers between entities.
- 2
Check eligibility at exit
Five years of continuous service, subject to the Act's exceptions.
- 3
Calculate
15 ÷ 26 × last drawn basic and DA × completed years.
- 4
Pay in the settlement
Include gratuity in the full and final settlement.
- 5
Provision in advance
Set aside the accruing liability each year.
Best practices
- Keep the original date of joining on the record across transfers.
- Provision for gratuity every year rather than at exit.
- Show employees their accrued entitlement where appropriate.
Mistakes to avoid
- Calculating gratuity on gross salary.
- Resetting service on an internal transfer.
- Forgetting gratuity in the final settlement of a long-serving employee.
How software helps
Software keeps service continuous across transfers, calculates gratuity from the last drawn basic on the record, and includes it in the final settlement automatically when an eligible employee exits.
Questions about gratuity
Fifteen days' wages for every completed year of service, where a day's wage is last drawn basic and DA divided by twenty-six.
Generally after five years of continuous service, with exceptions prescribed in the Payment of Gratuity Act.
The Act uses a twenty-six day month, reflecting working days rather than calendar days.
Gratuity = 15 ÷ 26 × last drawn basic and DA × completed years of service.
No. Gratuity is calculated on last drawn basic pay plus dearness allowance, not gross salary.
It should not. Service should be tracked from the original joining date and carried across transfers between entities; resetting it on transfer is a common mistake.
Gratuity is a liability that grows every year an employee stays and is paid in one amount at exit. Provisioning each year avoids meeting it as a surprise in the final settlement.
At exit, as part of the full and final settlement, when the employee is eligible.