The gratuity formula is short enough to memorise:
> Last drawn basic + DA × 15 ÷ 26 × completed years
And the single most common error is in the first term. Companies compute it on gross, or occasionally on CTC, and arrive at a number half as large again as the real one.
What that costs in both directions
If you are provisioning, you are carrying a liability materially larger than the one you have. On a workforce of two hundred with average tenure of six years, the difference is not a rounding error — and it sits in your accounts distorting a number people make decisions on.
If you are paying, you have overpaid, and having done it once for one departing employee you have created an expectation you will be asked to meet again.
The error is easy to make because gross is the number most visible on a payslip, and because "last drawn salary" in casual speech means take-home.
Two other places it goes wrong
Reading five years literally. Four years and seven months has repeatedly been held to satisfy the continuous service condition. An employer refusing on a strict count of sixty months is in a weak position, and it is worth taking advice before doing so rather than after.
Assuming the whole amount is tax free. Gratuity is exempt up to a prescribed ceiling, under a formula that differs depending on whether the employee is covered by the Payment of Gratuity Act. Above the ceiling it is taxable. For long-serving senior employees the payable amount routinely exceeds the ceiling, so the exemption should be computed rather than assumed.
The check worth running
Take your three most recent gratuity settlements. For each, confirm the salary figure used was basic plus DA and nothing else, that completed years were counted from the actual joining date, and that the exemption was computed rather than applied wholesale.
If all three are right, your process is sound. In our experience one of the three usually is not — and it is nearly always the first item.
And the provisioning question
Gratuity accrues quietly and becomes payable suddenly. A company that has never provisioned for it discovers the liability when three long-serving employees leave in the same quarter. Computing the accrued position from actual joining dates and current salaries, once a year, turns that from a shock into a number.