Gratuity is a retirement benefit paid by employers to employees as a token of appreciation for long-term service. In India, it’s governed by the Payment of Gratuity Act, 1972, and recent labour reforms that make the benefit more inclusive. Gratuity is usually paid when an employee retires, resigns after qualifying service, becomes disabled, or dies in service. The amount is based on the last drawn salary and years of service, helping employees receive a lump sum at the end of their career for financial security.

What is Gratuity?

Gratuity is a statutory monetary benefit provided by an employer to an employee for continuous service over a period. It acts as a financial cushion post-employment and is widely recognized as a social security benefit under Indian law.

It applies primarily when:

The employee retires or is superannuated.
The employee resigns after completing the qualifying service.
The employee is disabled due to illness or accident.
In the event of the employee’s death, a nominee gets gratuity.
Recent reforms have made benefits more accessible, reducing minimum service requirements for certain workers, like fixed-term or contract employees.

Who is eligible for Gratuity?

Standard Eligibility

To qualify for gratuity benefits:

An employee must have completed at least 5 years of continuous service with the same employer.
This requirement is relaxed if termination is due to death or disability; no 5-year rule applies.

New Labour Code Developments

Under the updated labour framework, effective November 21, 2025, eligibility has been broadened in many cases. For example, Contract and fixed-term employees may qualify after 1 year of service, not 5 under the old law. This change be nefits workers without permanent appointments

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Employee Category

Old Law (Gratuity)

New Labour Code

Regular/Permanent

5 Years

5 Years (Remains the same)

Fixed-Term Employment

5 Years

No minimum limit (Pro-rata basis)

Working Journalists

5 Years

3 Years

How to calculate Gratuity Amount

Standard Formula (Act-Covered Employees)

For organisations covered under the Payment of Gratuity Act, the gratuity formula is:

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

Where:

Last Drawn Salary = Basic Salary + Dearness Allowance (DA)
15 signifies 15 days’ wages for each completed year of service
26 reflects the number of working days considered per month for gratuity purposes.

Rounding: If the extra months of service are 6 months or more, round up to the next full year.

Example:
If an employee’s last drawn salary is ₹30,000 and service is 10 years:
Gratuity = (30,000 × 15 × 10) ÷ 26 ≈ ₹1,73,076

Calculate Gratuity in Seconds with our Gratuity calculator!

For Employers not covered by the Act

If the firm isn’t bound by the Act, the divisor may be 30 (total days in a month), leading to:

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30

Maximum Gratuity Limit

As per statutory rules, the maximum gratuity payable is capped (e.g., ₹20 lakh). Even if calculated gratuity exceeds this, the employee can only receive up to this statutory cap; any excess may be treated differently under company policy.

Exceptional Cases

Death/Disability: If an employee dies or becomes disabled, gratuity is often paid regardless of the 5-year rule.
Termination Before 5 Years: Not eligible under normal rules, but exceptions apply for death/disability.

Taxation of Gratuity

For private sector employees, gratuity up to a specified exemption limit (e.g., ₹20 lakh) may be tax-free under Section 10(10) of the Income Tax Act, provided conditions are met. Earnings above the exemption limit may be taxable.

When Employers must pay Gratuity

Employers are required to pay gratuity within 30 days from the date it becomes due. If payment is delayed beyond this timeframe, interest may be payable on the late gratuity amount.

Conclusion

Gratuity is a crucial employee benefit that rewards loyalty and long service. Eligibility typically hinges on completing 5 years of continuous service, though recent labour reforms are making it accessible earlier for certain employee categories. The amount is calculated using a clear formula based on the last drawn salary and service tenure, with statutory caps and tax benefits under Indian law. Understanding the eligibility and calculation ensures employees receive full-entitled benefits and employers remain compliant.

Frequently Asked Questions (FAQs)

What is gratuity?

A retirement benefit paid by employers based on service length and last drawn salary.

When is an employee eligible for gratuity?

Generally after 5 years of continuous service; exceptions exist for death/disability.

Has the eligibility period changed recently?

Yes, under new rules from Nov 2025, some employees (e.g., contract workers) may qualify after 1 year.

How do you calculate gratuity?

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26 for Act-covered establishments.

What counts as last drawn salary?

It includes basic salary + Dearness Allowance (DA).

Is there a cap on gratuity?

Yes, the statutory limit is usually ₹20 lakh for private sector benefits.

Can gratuity be paid early?

Standard eligibility is service-based; earlier payment may apply only in death/disability cases.

Is gratuity taxable?

Gratuity up to the exemption limit can be tax-free; amounts above may be taxable.

What happens on employee death?

The nominee typically receives gratuity, even if service was less than 5 years.

How soon must gratuity be paid?

Employers should pay within 30 days from the due date.

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