In the context of Indian payroll and employee benefits, how is gratuity commonly calculated under the Payment of Gratuity Act for eligible employees?

Introduction / Context:
Gratuity is a statutory benefit payable to eligible employees under the Payment of Gratuity Act in India. Employers and HR or payroll professionals must know how to calculate it correctly. This question tests whether you understand the standard formula used for gratuity calculation for employees covered under the Act. It is a frequent topic in HR, payroll, and labour law related interviews.

Given Data / Assumptions:

• The context is Indian law, specifically the Payment of Gratuity Act.
• We assume the employee is covered under the Act, works in an establishment where the Act applies, and has completed the minimum qualifying service, usually five years.
• Gratuity calculation is based on last drawn basic salary plus dearness allowance.
• The commonly used formula includes factors 15 and 26 and uses completed years of service with rounding rules.

Concept / Approach:
Under the Payment of Gratuity Act, gratuity for employees not covered by special rules is generally calculated using the formula: gratuity = last drawn basic salary plus dearness allowance multiplied by 15 and divided by 26, multiplied by the number of completed years of service. Here 15 represents 15 days wages for each completed year, and 26 represents the number of working days in a month assuming a six day week. If the employee has worked for more than six months in the final year, that year is often rounded up as a full year for gratuity purposes. This formula is widely cited in HR and payroll practice.

Step-by-Step Solution:
Step 1: Identify the components used for calculation, which are last drawn basic salary and dearness allowance, not full gross salary.Step 2: Recall the standard formula: gratuity = last drawn basic plus dearness allowance * 15 / 26 * number of completed years of service.Step 3: Note that 15 / 26 represents 15 days wages for each year of service, assuming 26 working days in a month.Step 4: Consider the rule that if an employee has worked more than six months in the final year, that year is treated as a full year for gratuity calculation.Step 5: Compare this understanding with the options. Option A describes exactly this formula and the rounding rule, so it is correct.

Verification / Alternative check:
To verify, you can plug in a simple example. Suppose an employee has a last drawn basic plus dearness allowance of Rs 20,000 and 10 completed years of service. Using the Act formula, gratuity would be 20,000 * 15 / 26 * 10. This matches HR manuals and statutory examples. Options that ignore the 15 / 26 factor or that use gross salary without specifying the statute do not match the legal formula, confirming that option A is correct.

Why Other Options Are Wrong:
Option B uses total gross salary for the last month multiplied by years of service without any divisor and does not reflect the 15 days wages per year concept. Option C claims gratuity is a fixed flat amount decided solely by the employer, which contradicts the statutory formula and minimum entitlements under the Act. Option D links gratuity to the sum of bonuses paid over five years, which has no basis in the Act and confuses different types of employee benefits.

Common Pitfalls:
Common mistakes include using gross salary instead of basic plus dearness allowance, forgetting the 15 / 26 factor, or misapplying the rounding rule for partial years of service. Some learners also confuse gratuity with provident fund or bonus. To answer correctly, always recall the core formula and the idea that gratuity provides 15 days of wages for each completed year of service, based on basic salary plus dearness allowance.

Final Answer:
Gratuity is commonly calculated as last drawn basic salary plus dearness allowance multiplied by 15 and divided by 26, then multiplied by the number of completed years of service, with service of more than 6 months rounded up to the next year.