What is Gratuity? Meaning, Eligibility, Calculation in India

• Gratuity is a lump-sum benefit an employer pays an employee for long, continuous service, and since 21 November 2025, it is governed by the Code on Social Security, 2020, not the Payment of Gratuity Act, 1972.
• The standard eligibility period remains 5 years of continuous service, but fixed-term employees now qualify for pro-rata gratuity after just 1 year of service.
• Gratuity for covered employees is calculated as (last drawn salary x 15 x years of service) / 26, capped at a statutory maximum of ₹ 20,00,000.
• Tax exemption on gratuity is also capped at ₹ 20,00,000 for both categories of private-sector employees, while government employees get an unlimited exemption.

Gratuity in salary is an employer's obligation towards employees for services rendered. The employer pays the gratuity if the employee has completed a specified period in service.

Gratuity can also be interpreted as an extra money given above regular wages, and the amount of gratuity is at the employer’s discretion.

Gratuity payment is a component of the gross salary. It is not a regular payment but a lump sum amount paid when the employee leaves. The gratuity in salary is calculated using the basic salary and varies based on the company's policies and duration of service.

Employers have the option to pay the gratuity amount from their own funds, or they can opt for group gratuity insurance coverage.

• Employers have the option to pay the gratuity amount from their own funds, or they can opt for group gratuity insurance coverage.
• The second option is a widespread practice, especially for larger organisations, where the gratuity payment is a considerable expense.
• In a gratuity insurance plan, the company pays annual contributions to an insurance company, which invests the contribution amounts in various instruments.
• The returns generated are used to fund the gratuity amount payable to the employees.

• The Payment of Gratuity Act, 1972, governs the gratuity that is payable to employees who work in factories, oilfields, mines, ports, railway companies, plantations, shops or other establishments.
• An establishment should have at least 10 employees on any given day during a period of 12 months if it is to be regulated by the Act.
• Even if the number of employees decreases, the company must still pay gratuity.
• On 21 November 2025, the Central Government notified the Code on Social Security, 2020 (Act No. 36 of 2020), which consolidates the Payment of Gratuity Act, 1972, along with eight other social security laws into a single code.
• Gratuity is now dealt with under Section 53 of this Code.
• The Ministry of Labour and Employment has clarified that gratuity calculations under the new provisions apply from 21 November 2025 onwards.
• The Central Rules under the Code were still in draft form as of the ministry's December 2025 notification, so until they are finalised, establishments continue to follow the existing Payment of Gratuity (Central) Rules, 1972, for procedural matters such as forms and timelines.
• As per the Act, to be entitled to gratuity, an employee must have worked with the employer for a minimum of five years with no gaps.
• So, if the employee quits before five years, gratuity is not paid.
• However, as per the current gratuity rules, an employee is eligible for gratuity after completing 240 days of service in the fifth year of employment.
• The tenure is treated as five years.
• The five-year rule targets inspiring employees to work for a longer period with the company, which is good for the employer and the employee.
• The rule ensures that employees who contribute significantly to the company's growth are recognised and rewarded.
• The five-year rule is not applicable in the case of an employee's death or disability, and the employee's nominee receives gratuity.
• The nominee can be a family member or any other person nominated by the employee. Interns and contractual workers are not eligible for gratuity. That is because they are not permanent employees of the company, and their employment is typically for a fixed duration or a project.
• Under the Code on Social Security, 2020, fixed-term employees, those hired on a written contract for a specific period, are now separately and explicitly entitled to gratuity on a pro-rata basis after completing just 1 year of continuous service, even though the standard 5-year rule continues to apply to permanent employees.
• This provision changes the "interns and contractual workers are not eligible" position for the specific case of fixed-term employees; interns and casual or contract labour engaged through a manpower contractor are still excluded.

The eligibility criteria for an employee to receive the gratuity amount from an employer are as follows:

• The employee should have completed at least five years of service with a single employer before resigning;
• The employee must be eligible for superannuation;
• The employee should have retired from work, or the employee should have suffered a disability or passed away due to an accident or illness.

To this list, the Code on Social Security, 2020, formally adds two more triggers: expiry of a fixed-term employment contract and any other event notified by the central government. For working journalists, the qualifying period is 3 years instead of 5, a provision that has been carried over from earlier law into the new Code.

• The Payment of Gratuity Act, 1972, did not fix a percentage of salary as gratuity; instead, it set out a formula, and the Code on Social Security, 2020, has carried the same formula forward at Section 53(2).
• There are two formulas, depending on whether the employee's establishment falls under the law's coverage or not.
• For employees covered under the law, gratuity is calculated as follows: Gratuity = (Last drawn salary x 15 x Number of years of service) / 26. Here, 'last drawn salary' means basic pay plus dearness allowance, and 26 represents the standard working days in a month (30 days minus 4 Sundays).
• For employees not covered under the law, gratuity is calculated as (last drawn salary x 15 x number of years of service) / 30. Here, all 30 days of the month are counted, and only the actual number of completed years is used, without the six-month rounding rule.

Worked example: take an employee with a last drawn salary (basic + DA) of ₹ 50,000 and 10 completed years of service.

• If covered under the law: (15 x 50,000 x 10) / 26 = ₹ 2,88,461 (rounded to the nearest rupee).
• If not covered under the law: (15 x 50,000 x 10) / 30 = ₹ 2,50,000.

Let us consider two scenarios here:

• One where an employee worked with a company for eight years and six months. Here, the number of years for gratuity calculation becomes nine.
• Two, when an employee worked for eight years and four months. Now, the number of years has become eight.

This six-month-or-more rounding rule applies only to employees covered under the law; for those not covered, the exact number of completed years is used, with no rounding.

Regardless of what the formula works out to, the amount is capped at ₹ 20,00,000.

Also Read: Gratuity Calculation: How is Gratuity Calculated?

In the case of an unforeseen death of an employee, the gratuity amount goes to the rightful nominee. It is calculated based on the employee's tenure and has a maximum limit of ₹ 20 lakh. The following table gives the gratuity amount payable by the employer in case of an employee's demise.

This tenure-based multiplier table is not part of the statutory gratuity formula under the Code on Social Security, 2020; it reflects the minimum death-benefit structure commonly used by group insurance schemes for gratuity, where insurers guarantee a payout even if an employee has not completed enough years of service for the formula-based amount to reach a meaningful figure. Under the law itself, gratuity on death is calculated using the same 15-day wages formula as a normal exit, without any minimum-service requirement, and remains capped at ₹ 20,00,000.

Section 10(10) of the Income Tax Act, 1961, decides how much of your gratuity is tax-free. The treatment depends on who you work for.

Government employees

Gratuity received by central government, state government, defence, and local authority employees on retirement, death, or termination is fully exempt from income tax, with no upper monetary limit.

Private sector; covered under the law

For private-sector employees covered under the Payment of Gratuity Act, 1972 / Code on Social Security, 2020, the tax-exempt amount is the least of the following three: the actual gratuity received; ₹ 20,00,000 or 15 days' salary for each completed year of service, calculated on the last drawn salary.

Private sector; not covered under the law

For private-sector employees not covered under the law, the tax-exempt amount is also the least of three: the actual gratuity received; half a month's average salary (based on the last 10 months) for each completed year of service; or ₹ 20,00,000.

Consider this example: let us suppose an employee received a gratuity of ₹ 9 lakh. But let's assume the gratuity calculated according to the formula is just ₹ 7 lakh. In this case, the tax exemption becomes applicable for ₹ 7 lakh. The balance amount, which is ₹ 2 lakh, will be taxable as per the existing income tax slabs. It is advisable to consult a tax expert. That way, you will have all the relevant and most accurate information regarding the taxation of your gratuity.

• An employer cannot refuse to pay gratuity simply because an employee resigned under a cloud or was dismissed for a routine performance issue. The law allows forfeiture only in narrowly defined situations.
• Full or partial forfeiture, limited strictly to the extent of the loss caused, is permitted where an employee's service is terminated for an act, wilful omission, or negligence that causes damage or loss to the employer's property.
• Full or partial forfeiture is also permitted where the employee's service is terminated for riotous or disorderly conduct, any other act of violence, or an offence involving moral turpitude committed in the course of employment.
• Outside these specific grounds, gratuity cannot be withheld; a plain resignation, a performance-based termination, or a workplace dispute that does not meet one of the conditions above does not permit forfeiture. Courts have repeatedly treated gratuity as a statutory right that can be denied only strictly within the conditions laid down by law, not as a matter of employer discretion.

Claiming gratuity is a straightforward three-step process, and the law puts a firm 30-day clock on the employer once a claim is made.

The employee or any authorised person should apply to the employer concerned for the gratuity. As a next step, the firm must compute the sum and inform the governing authority and the employee of the calculated amount. The company has 30 days to pay gratuity to the recipient. If an employer is unable to pay the gratuity amount within the allotted time, the beneficiary can receive simple interest on that amount. The gratuity amount should be paid only in cash. The payment can be made via a demand draft (DD) or a cheque only when the employee, nominee, or legal heir specifically requests.

In practice, the application referred to above is made using a prescribed form called Form I under the Payment of Gratuity (Central) Rules, 1972. An eligible employee, or someone authorised to act on their behalf, submits Form I to the employer, ordinarily within 30 days of gratuity becoming payable.

It is possible that your gratuity amount is not given within the timeframe of 30 days. What should you do then? You must file a written complaint with the Controlling Authority.

• If the employer still does not pay, the claimant, their nominee, or legal heir can apply to the Controlling Authority (using Form IV under the existing Central Rules, pending the new Rules under the Code) within 90 days of the cause for the complaint arising, and the Controlling Authority can direct the Collector to recover the dues as arrears of land revenue.
• Under the Code on Social Security, 2020, an employer who fails to pay gratuity that is due is punishable with imprisonment for a term which may extend to 1 year, or a fine which may extend to ₹ 50,000, or both.

Gratuity nomination is an essential aspect of India's Payment of Gratuity Act 1972. As per the Act, if an employee completes one year of service in an organisation, they must file a nomination for gratuity payment in the unfortunate event of their demise. That is done by filling out and submitting a gratuity form. This ensures that the rightful person receives the payment after the employee's death. The employee must fill in and submit the nominee details in Form F. They are allowed to appoint more than one nominee. In case of any changes in the information or nomination, the employee can give written notice to the employer and fill out Form H. In the absence of a nominee, the gratuity amount will be paid to the legal heir of the employee.

• Fixed-term employees, hired directly by an employer under a written contract for a defined period, are now eligible for gratuity on a pro-rata basis after just 1 year of continuous service, instead of the standard 5 years. Gratuity in such cases is paid at contract expiry, calculated proportionately for the period actually worked.
• Contract labour engaged through a staffing agency or manpower contractor is treated differently. The Ministry of Labour and Employment has clarified that the 1-year fixed-term rule applies to employees directly engaged by the employer and does not extend to contract labour supplied through a contractor. Such workers remain eligible for gratuity under the standard 5-year rule, and the contractor, acting as their employer, is responsible for paying it.
• Part-time employees are not separately defined under the gratuity provisions of the Code, and no official government source was found specifying a distinct gratuity rule for part-time work as such. In practice, eligibility for a part-time employee turns on whether they meet the continuous-service test (240 days of actual work in a year, or the fixed-term/contract classification described above) rather than on the number of hours worked per day.
• Interns and apprentices engaged under the Apprentices Act, 1961, continue to fall outside gratuity coverage, since they are not treated as 'employees' for this purpose.

Working out gratuity by hand is simple enough with the formula above, but a ready-made tool removes the room for error. Aditya Birla Capital's Gratuity Calculator offers a few practical advantages:

• Speed: enter your monthly salary (Basic + DA) and years of service, and the tool returns your gratuity amount in seconds.
• Accuracy: It applies the correct 15/26 or 15/30 formula automatically, removing the risk of a manual calculation error.
• No cost: the calculator is free to use, with no sign-up or payment required.
• Ease of use: the interface needs only two inputs, so it's accessible even if you're not comfortable working through the formula yourself.
• Planning tool: Because it's quick to re-run, it's useful for comparing what-if scenarios (for example, staying a few more years) when planning a resignation or retirement date.

In summary, gratuity is a financial benefit that employers give to their employees in appreciation of their service, subject to meeting certain eligibility criteria. This significant terminal benefit fosters employee stability, commitment, and loyalty during their tenure. This token of appreciation acknowledges an employee's service, providing a lump sum payment that serves as both retirement savings and social security. It is solely the employer's cost and cannot be included in the employee's CTC (Cost to Company).

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product.

Also Read: Taxation of Gratuity - Everything you Need To Know