Business Laws and Ethics · Payment of Gratuity Act, 1972

How to Calculate Gratuity and Its Maximum Limit

Updated 10 October 2026 · Fact-checked

Under Section 53 of the Code on Social Security, 2020, gratuity is 15 days' wages for every completed year of service, counting a part year above six months as a full year. For a monthly rated employee: last drawn monthly wages ÷ 26 × 15 × years. The amount cannot exceed the limit the Central Government notifies.

Understand Calculation and Maximum Limit of Gratuity

Gratuity is a lump sum an employer pays when an employee leaves after long service. It is a reward for service. Section 53 says who gets it and how much.

First check eligibility. The general rule is continuous service of not less than five years. The five-year condition is not needed on death, disablement or expiry of a fixed term. For a working journalist, five years is read as three years.

Next, the amount. The employer pays 15 days' wages (or such number of days as the Central Government notifies) for every completed year of service or part of a year in excess of six months. The wages used are the rate of wages last drawn. So the final salary matters, not the average.

For a monthly rated employee, Explanation 3 fixes how the 15 days' wages are found: divide the monthly wages last drawn by 26, then multiply by 15.

The Act also has special cases: piece-rated employees, seasonal establishments, fixed term and deceased employees (pro rata), and a ceiling. The amount payable cannot exceed the amount notified by the Central Government. The Act does not fix a rupee figure in the text. Do not write one unless the question gives it.

Key rules to remember

Gratuity for monthly rated employee: Gratuity = (Last drawn monthly wages ÷ 26) × 15 × Number of years of service; Explanation 3 to Section 53. Years means completed years, plus one more if the part year exceeds six months. 15 days is the rate unless the Central Government notifies a different number of days; use the number the question gives.
Rounding of service period: Part of a year in excess of six months = counted as one full year; Exactly six months or less is ignored. Example: 8 years 6 months = 8 years; 8 years 7 months = 9 years.
Piece-rated employee: daily wage: Daily wages = Average of the total wages received in the 3 months immediately preceding termination of employment (overtime wages excluded); Section 53(2) first proviso. Wages paid for overtime work are not taken into account. The proviso gives no other divisor, so use the daily wage figure the question works out or gives.
Seasonal establishment: Gratuity = 7 days' wages for each season; Section 53(2) second proviso. Applies to an employee of a seasonal establishment who is not employed throughout the year. Eligibility depends on Section 54(C): actual work on at least 75% of the days the establishment was in operation. Use the daily wage as given in the question.
Fixed term or deceased employee: Gratuity is paid on a pro rata basis; Section 53(2) third proviso. Five years' service is not required for death or expiry of fixed term.
Ceiling: Gratuity payable ≤ amount notified by the Central Government; Section 53(3). Apply the limit given in the question. Compare your computed figure to it and pay the lower.

How to solve Calculation and Maximum Limit of Gratuity questions

Use the same sequence for every gratuity problem. It protects step marks and avoids the usual traps.

1Check eligibility: continuous service of at least five years (three for working journalists), or an exempt event such as death, disablement or expiry of fixed term. Section 54 decides what counts as continuous service.
2Identify the type of employee: monthly rated, piece-rated, seasonal, fixed term or deceased.
3Find the wages last drawn. Use the components the question treats as wages, and ignore overtime for piece-rated workers.
4Compute the service period and apply the six-month rule: more than six months becomes one full year, otherwise drop it.
5Apply the formula: monthly wages ÷ 26 × 15 × years. For seasonal staff, use 7 days' wages per season.
6Compare with the ceiling notified by the Central Government, if the question gives one. Gratuity is the lower amount.
7Check for forfeiture under Section 53(6) or any better contractual terms under Section 53(5), then write the final answer in rupees.

Quickest way: The 15/26 shortcut

When to use it: Use for monthly rated employees when the question gives last drawn wages and years of service.

Compute the fraction: 15 ÷ 26 of one month's wages is the gratuity for one year.
Multiply by the rounded number of years.
Check the ceiling by comparing the answer with the given limit.
Write the formula line first, then the numbers. Even if the arithmetic slips, you keep the method marks.

Common mistakes in Calculation and Maximum Limit of Gratuity

Dividing monthly wages by 30 instead of 26
Students think of a month as 30 days.
Fix: Explanation 3 to Section 53 says divide by 26 and multiply by 15 for monthly rated employees. Memorise 15/26.
Rounding up when the part year is exactly six months
The words 'six months' make students round up by habit.
Fix: The rule is part of a year in excess of six months. Exactly six months is not in excess, so it is ignored.
Using average salary of the last year
Confusing gratuity with other benefits.
Fix: Use the rate of wages last drawn. Average is used only for piece-rated employees (last three months, overtime excluded).
Applying the five-year rule to death or disablement
Students learn eligibility as one fixed rule.
Fix: The second proviso to Section 53(1) removes the five-year condition for death, disablement and expiry of fixed term. Death and fixed term are paid pro rata.
Forgetting the ceiling
Students stop once the formula gives a figure.
Fix: Always compare with the amount notified by the Central Government under Section 53(3) and pay the lower figure.
Using 15 days per season for a seasonal establishment
Students carry the general rate over.
Fix: For a seasonal employee not employed throughout the year, the rate is seven days' wages for each season.

Worked examples

Example 1

Rajesh Kumar worked with Shree Textiles Ltd. for 12 years 8 months and resigned. His last drawn monthly wages were ₹31,200. Calculate his gratuity. Assume the notified ceiling is not exceeded.

Show the solution

Eligibility: 12 years 8 months is more than five years of continuous service, and he resigned, so he is eligible under Section 53(1)(b).
Service period: 8 months is more than six months, so it counts as a full year. Years = 13.
Wages for 15 days = ₹31,200 ÷ 26 × 15 = ₹1,200 × 15 = ₹18,000.
Gratuity = ₹18,000 × 13 = ₹2,34,000.
Ceiling: the question says it is not exceeded, so no reduction.

Answer: Gratuity payable = ₹2,34,000.

Example 2

Anita, a monthly rated employee of Sunrise Sugars, retired after 20 years 5 months. Last drawn monthly wages were ₹59,800. Separately, Mohan works in a seasonal establishment and is not employed throughout the year. He worked 4 seasons and, in each, actually worked on at least 75% of the days the establishment was in operation. His daily wage, as given, is ₹800. Compute the gratuity of each. Assume the notified limit is ₹20,00,000.

Show the solution

Anita: 5 months is not more than six months, so it is ignored. Years = 20.
Anita's 15 days' wages = ₹59,800 ÷ 26 × 15 = ₹2,300 × 15 = ₹34,500.
Anita's gratuity = ₹34,500 × 20 = ₹6,90,000. This is below ₹20,00,000, so it is payable in full.
Mohan: he worked at least 75% of the days the establishment was in operation, so he is treated as in continuous service under Section 54(C). The seasonal rate is 7 days' wages per season.
Mohan's gratuity = ₹800 × 7 × 4 = ₹22,400.

Answer: Anita: ₹6,90,000. Mohan: ₹22,400.

Exam tips

Write the formula line before substituting. It earns marks even if the arithmetic is wrong.
Read the service period carefully. Questions often use 6 months exactly or 6 months and a few days to test the rounding rule.
State the eligibility check in one line first, especially when the question mentions death, disablement or a fixed term contract.
For ceiling-based MCQs, compute the amount, then compare with the limit in the question. The answer is the lower one.
Keep Sections 53 and 54 straight: Section 53 is payment and amount; Section 54 is continuous service.

Practice questions from Payment of Gratuity Act, 1972

Calculation and Maximum Limit of Gratuity: frequently asked questions

What is the formula for gratuity under the Code on Social Security, 2020?

For a monthly rated employee, gratuity = last drawn monthly wages ÷ 26 × 15 × years of service. This comes from Section 53(2) and Explanation 3. The 15 days is the rate unless the Central Government notifies a different number of days. A part year above six months counts as a full year.

What is the maximum limit of gratuity?

Section 53(3) says the amount shall not exceed the amount notified by the Central Government. The Act does not state a rupee figure in its text. In an exam, use the limit given in the question.

How is gratuity calculated for a seasonal establishment?

For an employee of a seasonal establishment who is not employed throughout the year, the employer pays seven days' wages for each season. This is under the second proviso to Section 53(2). For continuous service, Section 54(C) requires actual work on at least 75% of the days the establishment was in operation. Use the daily wage given in the question.

Is five years of service always required for gratuity?

No. The five-year condition does not apply on death, disablement or expiry of a fixed term employment. Working journalists need three years. In the fixed term and death cases, gratuity is paid pro rata.