Everything about gratuity in India -- eligibility criteria, calculation formula, tax exemption limits, and recent changes under the new labour codes.
Gratuity is a lump-sum payment that an employer makes to an employee as a token of appreciation for long-term service. Governed by the Payment of Gratuity Act, 1972, it is one of the key retirement benefits available to employees in India. Understanding gratuity rules helps you plan your finances better and ensure you receive the correct amount when you leave your job.
This guide covers the complete gratuity framework in India in 2026 -- eligibility, calculation formula, tax treatment, recent changes, and answers to common questions.
What Is Gratuity?
Gratuity is a statutory benefit payable to employees who have rendered continuous service of 5 years or more. It is calculated based on the employee's last drawn salary and total years of service. The employer is legally obligated to pay gratuity -- it is not discretionary.
The Payment of Gratuity Act applies to:
- Every factory, mine, oilfield, plantation, port, and railway company. - Every shop or establishment with 10 or more employees on any day in the preceding 12 months.
Once the Act applies to an establishment, it continues to apply even if employee count falls below 10.
Eligibility for Gratuity
### Standard Rule: 5 Years of Continuous Service
An employee becomes eligible for gratuity after completing 5 years of continuous service with the same employer. This applies to:
- Resignation - Retirement - Superannuation (reaching the retirement age specified by the employer)
### Exceptions to the 5-Year Rule
Gratuity is payable irrespective of years of service in the following cases:
- Death of the employee: Gratuity is paid to the nominee or legal heir even if the employee had not completed 5 years. - Disablement: If the employee becomes disabled due to disease or accident, gratuity is payable regardless of service length.
### The 4 Years 240 Days Rule
Courts have established that an employee who has worked for 4 years and 240 days (190 days for establishments working below ground in mines) is deemed to have completed 5 years of continuous service. This is an important clarification -- if you resign after 4 years and 8 months, you are eligible for gratuity.
### Forfeiture of Gratuity
An employer can forfeit gratuity, wholly or partially, if the employee is terminated for:
- Riotous or disorderly conduct. - Any act of violence against the employer, property, or another employee. - Any act that constitutes a criminal offence involving moral turpitude (provided the employee is convicted).
Gratuity Calculation Formula
### For Employees Covered Under the Act
Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26
Where: - Last drawn salary = Basic salary + Dearness Allowance (DA). - 15 = 15 days' wages for each year of service. - 26 = Working days in a month (as defined under the Act). - Years of service = Completed years. If the last year has more than 6 months, it is rounded up to the next year.
### For Employees Not Covered Under the Act
Some employers (typically in the private sector with fewer than 10 employees) may offer gratuity on a contractual basis. The formula used is:
Gratuity = (Last Drawn Salary x 15 x Years of Service) / 30
The divisor is 30 (calendar days) instead of 26 (working days), resulting in a slightly lower amount.
### Calculation Examples
Example 1: An employee covered under the Act with a last drawn salary (Basic + DA) of Rs 50,000 and 12 years of service.
Gratuity = (50,000 x 15 x 12) / 26 = Rs 3,46,154
Example 2: Same employee with 12 years and 7 months of service. Since the last year exceeds 6 months, service is rounded up to 13 years.
Gratuity = (50,000 x 15 x 13) / 26 = Rs 3,75,000
Use our gratuity calculator to compute your exact gratuity amount.
Maximum Gratuity Limit
The Payment of Gratuity Act currently caps the maximum gratuity payable at Rs 25 lakh. This limit was revised from Rs 20 lakh in 2024. Any gratuity exceeding this amount is at the employer's discretion -- many large companies and government organisations pay above the statutory limit.
For central and state government employees, the gratuity cap has been raised to Rs 25 lakh. PSU employees typically follow their own gratuity rules, often with higher limits.
Tax Treatment of Gratuity
The tax treatment depends on whether the employee is a government employee, a private employee covered under the Act, or a private employee not covered under the Act.
### Government Employees
Gratuity received by central and state government employees, employees of local authorities, and defence personnel is fully exempt from income tax under Section 10(10)(i). There is no monetary limit on this exemption.
### Private Sector Employees Covered Under the Act
The least of the following three amounts is exempt from tax:
1. Actual gratuity received. 2. Rs 25 lakh (the statutory limit). 3. 15 days' salary for each completed year of service (calculated as per the formula above).
### Private Sector Employees Not Covered Under the Act
The least of the following three amounts is exempt from tax:
1. Actual gratuity received. 2. Rs 25 lakh. 3. Half a month's salary for each completed year of service (based on the average salary of the last 10 months).
### Tax Filing
Report the gratuity received and the exempt portion in your ITR under Section 10 exemptions. The taxable portion (if any) is added to your income from salary.
Proposed Changes Under New Labour Codes
The Indian government has enacted four labour codes that consolidate 29 existing labour laws. The Code on Social Security, 2020 includes several changes affecting gratuity:
### Key Proposed Changes
1. Reduced eligibility period: The eligibility threshold may be reduced from 5 years to 1 year for fixed-term contract employees. This means employees on fixed-term contracts would be eligible for proportionate gratuity even for shorter stints. 2. Gig and platform workers: The new code extends social security coverage to gig workers and platform workers. While gratuity specifically may not apply, a social security fund is envisaged. 3. Wages definition change: The definition of "wages" for gratuity calculation may change. Under the new code, if allowances (HRA, conveyance, etc.) exceed 50% of total remuneration, the excess would be treated as basic wages for PF and gratuity calculation. This could increase gratuity amounts for employees with a low basic salary component.
### Implementation Status
As of mid-2026, the implementation of the new labour codes is still being rolled out in phases. Several states have notified the rules, while others are in the process. Employers and employees should track notifications from their respective state governments.
Gratuity and Your Retirement Planning
Gratuity is one of three pillars of retirement benefits for salaried employees in India, alongside the Employees' Provident Fund (EPF) and superannuation/pension. A long-serving employee can accumulate a substantial gratuity:
| Monthly Basic + DA | Years of Service | Gratuity Amount | |---|---|---| | Rs 30,000 | 10 years | Rs 1,73,077 | | Rs 50,000 | 15 years | Rs 4,32,692 | | Rs 75,000 | 20 years | Rs 8,65,385 | | Rs 1,00,000 | 25 years | Rs 14,42,308 | | Rs 1,00,000 | 35 years | Rs 20,19,231 |
When planning for retirement, factor in your projected gratuity alongside EPF balance and pension. Use our NPS calculator to plan additional retirement savings.
How to Claim Gratuity
1. Submit Form I: The employee (or nominee in case of death) must submit a written application to the employer within 30 days of it becoming payable. 2. Employer processes: The employer must calculate and pay the gratuity within 30 days of receiving the application. 3. Dispute resolution: If the employer delays or disputes the amount, the employee can approach the Controlling Authority (typically the Labour Commissioner) for resolution. 4. Interest on delayed payment: If gratuity is not paid within 30 days, the employer is liable to pay simple interest at 10% per annum from the date it became payable.
FAQ
Q: Is gratuity deducted from salary every month? A: No, gratuity is not deducted from your salary. It is an obligation of the employer, paid entirely from the employer's funds. Some employers provision for it through gratuity insurance or a gratuity trust.
Q: Do I get gratuity if I resign? A: Yes, you receive gratuity upon resignation provided you have completed 5 years of continuous service (or 4 years and 240 days, as courts have clarified).
Q: Is gratuity paid on the total salary or only basic salary? A: Gratuity is calculated on the last drawn basic salary plus dearness allowance (DA). Other components like HRA, conveyance, and special allowances are not included in the current formula.
Q: What happens to gratuity if an employee dies before 5 years? A: Gratuity is payable to the nominee or legal heir regardless of years of service in case of the employee's death. The 5-year rule does not apply.
Q: Can an employer refuse to pay gratuity? A: An employer can only forfeit gratuity if the employee was terminated for violent or criminal misconduct as defined under the Act. In all other cases, including resignation, retirement, or retrenchment, the employer is legally bound to pay.
This article is for educational purposes and does not constitute financial advice.