Gratuity is a lump sum an employer pays you for long service. It is not a bonus at the employer's discretion. Under the Payment of Gratuity Act, 1972, it is a statutory right for employees of covered establishments, and the employer must pay it whether or not you asked.
The Act applies to factories, mines, plantations, shops and establishments employing 10 or more people. Once the Act applies to an establishment, it continues to apply even if the headcount later falls below 10.
When you become eligible
You qualify after five years of continuous service with the same employer, and it becomes payable when you resign, retire, are terminated, or in the case of death or disablement.
Two important exceptions to the five year rule:
- Death or disablement. The five year requirement does not apply. Gratuity is paid to the nominee or the employee regardless of tenure.
- The 4 years 240 days question. Courts have held in several cases that a fifth year is treated as complete where the employee has worked 240 days in that year. This is not universally applied by every employer, and it depends on the establishment's working pattern, so it is worth checking rather than assuming either way.
Gratuity is payable on resignation, not only retirement. Many employees leaving a job after six or seven years simply never claim it.
The formula
For employees covered by the Act:
Last drawn monthly salary multiplied by 15 divided by 26, multiplied by completed years of service.
- "Salary" means basic pay plus dearness allowance only. Not HRA, not allowances, not bonus, not your CTC.
- 26 represents working days in a month, and 15 represents half a month's wages for each year served.
- Service beyond six months in the final year is rounded up to a full year; six months or less is rounded down.
A worked example. Basic plus DA of Rs 50,000, with 10 years of service:
50,000 multiplied by 15 divided by 26 equals Rs 28,846 per year of service. Multiply by 10 years and the gratuity is roughly Rs 2.88 lakh.
Now the same person after 15 years and 7 months. The service rounds to 16 years, giving about Rs 4.62 lakh.
For employees not covered by the Act, the formula uses 15 divided by 30 instead of 15 divided by 26, and rounding is not applied in the same way, producing a somewhat lower figure. Check which basis your employer uses.
Work out your own number with the gratuity calculator.
Tax treatment
Gratuity is tax-free up to a ceiling. For non-government employees covered by the Act, the exempt amount is the least of:
- The actual gratuity received
- The amount calculated by the statutory formula
- The notified ceiling, which has been Rs 20 lakh
Anything above that is taxable as salary income. Government employees receive gratuity fully exempt.
The ceiling has been revised upward more than once (from Rs 10 lakh to Rs 20 lakh, with further revisions discussed), so confirm the current notified limit before assuming a figure. Note also that the exemption is a lifetime limit across all employers, not a fresh Rs 20 lakh at each job.
Timing and what to do if it is not paid
The employer must pay gratuity within 30 days of it becoming due. Beyond that, simple interest is payable on the delayed amount.
The process is straightforward. Submit Form I to the employer, normally within 30 days of leaving, though a late application does not by itself extinguish the claim. If the employer refuses or delays, the escalation is a written notice, then an application to the Controlling Authority under the Act, which is usually the local labour commissioner. This is a genuine legal remedy that employees use successfully, and it does not require a lawyer to start.
Points that catch people out
- Job changes reset the clock. Gratuity is per employer. Four years at each of three companies earns nothing. This is one of the quiet costs of frequent switching.
- Contract and consultant roles usually do not count. Gratuity applies to employees, not to those engaged on a contract for service.
- Transfers within a group may or may not preserve continuous service depending on how the transfer is documented. Get it in writing.
- CTC statements often show a gratuity line. That is an accrual, not money you own until you complete five years.
- Forfeiture is possible where an employee is terminated for wilful misconduct causing damage or for an offence involving moral turpitude, and only to the extent of the damage.
Gratuity sits alongside EPF and NPS as part of the retirement corpus you accumulate simply by staying employed, and it is worth adding to your net worth calculation once you have crossed five years.