Gratuity Rules & Eligibility in India
Gratuity is a lump sum an employer owes an employee who completes five years of continuous service, at establishments with 10 or more staff. It is calculated as (15 ÷ 26) × last-drawn monthly wage × years of service, is tax-exempt up to ₹20,00,000, and must be paid within 30 days of falling due. Death or disablement waives the five-year condition.
General guidance, not legal or tax advice
The short answer
Five years of service earns a lump sum of 15 days’ wages per year, capped at ₹20,00,000 tax-free.
Gratuity rewards long service. It becomes payable after five years of continuous service (waived on death or disablement), is funded entirely by the employer, and follows the (15 ÷ 26) × last-drawn wage × years formula. The exemption cap is ₹20,00,000, and payment is due within 30 days. Size any employee’s entitlement in seconds with the gratuity calculator.
Who is eligible — the four rules that decide it
Eligibility turns on the size of the establishment and the length and manner of service. These four rules together settle almost every case.
Employer trigger
The Payment of Gratuity Act, 1972 applies to establishments with 10 or more employees. Once covered, the duty continues even if headcount later falls below 10.
Service condition
An employee qualifies after five years of continuous service. A year in which they work 240 days or more counts as a full year, so a genuine 4-years-and-8-months tenure can still qualify.
Waiver on death or disablement
The five-year condition is waived entirely if service ends because of the employee’s death or disablement — gratuity is payable for the years actually served.
Fixed-term staff
Under the Code on Social Security, 2020, fixed-term employees now earn pro-rata gratuity, so a one-year contract can attract a gratuity payment on completion without the five-year wait.
The gratuity formula, worked through
For employees covered by the Payment of Gratuity Act, the statutory formula pays 15 days’ wages for each completed year of service, based on the last-drawn basic plus dearness allowance. The 15 stands for 15 days’ pay and the 26 for the working days in a month:
Gratuity = (15 ÷ 26) × last-drawn monthly wage (basic + DA) × years of service
Take an employee whose last-drawn basic plus DA is ₹50,000 a month, leaving after 8 years of continuous service:
Monthly wage (basic + DA)
Completed years of service
Gratuity payable
(15 ÷ 26) × ₹50,000 × 8 = ₹2,30,769, fully tax-exempt as it sits under the ₹20,00,000 cap. Run your own figures in the gratuity calculator.
The ₹20 lakh cap and the 30-day clock
Gratuity is tax-exempt in the employee’s hands up to ₹20,00,000 across their whole career. The exemption is the least of the actual gratuity received, the ₹20,00,000 statutory limit, or the 15/26 formula amount — anything above the cap is added to taxable income and taxed at the employee’s slab rate.
On timing, the employer must pay within 30 days of the gratuity falling due, which is usually the last working day. Miss that window and simple interest — commonly 10% a year — runs on the unpaid amount. Larger teams often pre-fund the liability through a group gratuity scheme rather than settling it from cash flow at each exit, so a wave of long-tenure departures never strains working capital.
The one-line version
Gratuity rewards the past. Health cover protects the present — you owe your team both.
A service reward, not health protection
Gratuity is a backward-looking reward for loyalty — it pays out once, on exit, for years already served. It does nothing for an employee facing a hospital bill today, and nothing for the four-in-five staff who leave before the five-year mark. Like EPF and ESI, it is part of the statutory floor, not a benefits programme.
That is where voluntary benefits earn their place. An employer group health insurance plan gives every employee — from day one, regardless of tenure — cashless treatment at network hospitals. See how the full payroll stack fits together in the PF, ESI, PT & gratuity guide and the employer compliance pillar.
Frequently asked questions
Gratuity is payable by establishments with 10 or more employees to anyone who completes five years of continuous service. A year with 240 or more days worked counts as a full year, so an employee with about 4 years and 8 months can often qualify. The five-year rule is waived if service ends due to death or disablement.
For employees covered by the Payment of Gratuity Act, the amount is (15 ÷ 26) × last-drawn monthly wage (basic + DA) × completed years of service. The 15 represents 15 days’ wages per year and 26 the working days in a month. For example, ₹50,000 last-drawn wage over 8 years gives (15 ÷ 26) × 50,000 × 8 = ₹2,30,769.
Gratuity is tax-exempt in the employee’s hands up to ₹20,00,000 across their career. The exemption is the least of the actual gratuity received, the ₹20,00,000 statutory limit, or the amount from the 15/26 formula. Anything above ₹20,00,000 is added to taxable income and taxed at the employee’s slab rate.
Gratuity must be paid within 30 days of it becoming due — typically the employee’s last working day. If the employer delays beyond 30 days, simple interest (commonly 10% a year) is payable on the amount for the period of delay. The employer cannot withhold gratuity except in narrow cases such as termination for proven misconduct causing loss.
Yes. Under the Code on Social Security, 2020, fixed-term employees are entitled to pro-rata gratuity, so the usual five-year threshold does not apply to them. A fixed-term worker who completes a one-year contract can be owed gratuity for that period — a significant change for employers who rely on contract hiring.
Beyond the statutory minimum, give your team real cover
Gratuity rewards the years served. Onsurity protects your team every day in between — cashless cover at 10,000+ network hospitals on a monthly subscription. Get a group health quote and see the per-employee cost.
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