Explain when an employee in India is eligible for gratuity and how it is calculated.
What the interviewer wants to hear
- Generally payable after five years of continuous service on exit
- Exception for death or disablement
- Formula 15 / 26 x last drawn basic plus DA x years of service
- Part year of more than six months rounded up
- Subject to the statutory maximum and tax rules
Model answer
Under the gratuity law, an employee generally becomes eligible after five years of continuous service when they leave, whether by resignation, retirement or termination. The five-year rule does not apply on death or disablement, where gratuity is paid to the employee or nominee. For employers covered by the Act, the formula is 15 divided by 26, times last drawn monthly basic plus DA, times completed years of service. The 15 over 26 means fifteen days of wages for each year, based on 26 working days in a month. A final part year of more than six months counts as a full year. For example, a basic of 52,000 and 10 years gives 30,000 times 10, which is 3,00,000. The payment is subject to the statutory ceiling and has tax exemption limits, which I check before paying.
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