Section 4, Payment of Gratuity Act 1972 — How Gratuity Is Calculated

What the section does

• Gratuity is payable to an employee on termination after five years of continuous service, on superannuation, retirement or resignation, or on death or disablement.
• The five-year condition does not apply where employment ends because of death or disablement.
• The amount is fifteen days of wages for every completed year of service, based on the rate of wages last drawn, taking a month as twenty-six days.
• A part-year in excess of six months is treated as a full year; six months or less is not counted.
• The amount payable is capped by section 4(3), currently at ₹20,00,000.

Formula

(15 × last drawn wages × years) ÷ 26. Wages means basic plus dearness allowance, not gross salary. Capped at ₹20,00,000.

Where people go wrong

• Using gross salary. The computation runs on basic plus dearness allowance, and using gross inflates the figure substantially.
• Rounding every part-year up. Only a part-year of more than six months counts.
• Applying the five-year condition to a death case. It does not apply where employment ends by death or disablement.
• Missing the payment deadline. Section 7(3) requires payment within 30 days, and s.7(3A) adds interest for delay.

Common questions

How is gratuity calculated under section 4?

Fifteen days of wages for every completed year of service on a twenty-six day month: (15 × last drawn wages × years of service) ÷ 26. Wages means basic plus dearness allowance, and a part-year of more than six months counts as a full year.

What is the maximum gratuity payable?

₹20,00,000 under section 4(3). An employer may pay more as a contractual benefit, but the statutory entitlement is capped at that figure.

Is five years of service always required?

No. The five-year condition of continuous service does not apply where the employment ends because of the employee’s death or disablement, in which case gratuity is payable regardless of length of service.

Act on this

• Gratuity calculator
• Full and final settlement: what you owe, and when
• Full and final settlement statement

• Gratuity calculator
• Full and final settlement: what you owe, and when
• Full and final settlement statement

About this summary

A plain-English summary of what this provision requires, not a reproduction of it and not legal advice. Read alongside the bare Act, and take advice on anything turning on your own facts.