Gratuity

Quick Summary

Gratuity is a lump-sum financial benefit paid by an employer to an employee as a token of appreciation for their long-term service. In India, this is a legal requirement under the Payment of Gratuity Act, 1972. It is typically paid when an employee leaves the company after several years, whether due to resignation, retirement, or a job change.

What is Gratuity?

Think of gratuity as a “loyalty bonus” that is mandated by law. Unlike a Provident Fund (PF), gratuity is not deducted from your monthly take-home salary. Instead, the employer pays the entire amount from their own pocket at the time of your exit.

Eligibility Criteria

The rules for who gets gratuity and when have become more flexible in 2026 to protect different types of workers:

• Establishment Limit: Any business with 10 or more employees must provide gratuity. Once a company is covered by the Act, it remains covered even if the headcount later drops below 10.
• Permanent Employees: You generally need to complete 5 years of continuous service with the same employer to qualify.
  • The “4 Years & 240 Days” Rule: Legally, if you complete 240 days in your fifth year, you are often considered to have completed the full 5 years for gratuity purposes.
• Fixed-Term & Contract Staff: Under the 2026 updates, if you are on a fixed-term contract, you are eligible for pro-rata gratuity after just 1 year of service. You don’t have to wait for 5 years.
• Death or Disability: If an employee passes away or becomes disabled while in service, the 5-year requirement is waived completely. The gratuity is paid to the nominee or legal heir regardless of how long the employee worked.

Formula for Calculating Gratuity

Gratuity is calculated using the formula:

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

Where,

• Last Drawn Salary = Basic + Dearness Allowance (DA)
• 15 is the number of days’ salary paid for each year of service.
• 26 is the number of working days in a month (excluding Sundays).

Tax Benefits and Limits

• Private Sector: Gratuity is tax-free up to ₹20 lakh. Any amount above this limit is taxed as per your income tax slab.
• Government Sector: For government employees, the entire gratuity amount is typically tax-exempt (up to a limit of ₹25 lakh).
• Payment Timeline: The employer must pay the gratuity within 30 days of your last working day. If they delay, they may have to pay simple interest on the amount.

Nomination and Forms

It is highly recommended that every employee files a nomination early in their career to ensure the money goes to the right person in case of an emergency.

• Form F: The form you fill out to name your nominee (usually a family member).
• Form I: The form you submit to your employer to officially claim your gratuity when you resign or retire.
• Form L: The notice issued by the employer specifying the amount of gratuity and the date of payment.

When Can an Employer Refuse Payment?

An employer cannot withhold your gratuity for simple reasons like a “poor performance” review. It can only be forfeited in extreme cases of proven misconduct, such as:

• Damaging or destroying company property (the amount is deducted to cover the loss).
• Being terminated for riotous or violent behaviour.
• Acts involving “moral turpitude” (serious ethical or criminal offences).

FAQs