Gratuity is the one statutory payment most employees only think about when they are already leaving, which is the worst moment to discover how it works. It is also the one where the arithmetic is trivial and the arguments are entirely about definitions.
Fifteen days of pay for every completed year of service, divided by 26, after five years. Everything else on this page is about what counts as a year, what counts as pay, and the handful of situations where the five years does not apply.
Who is eligible
Two conditions have to be satisfied, one about the employer and one about the employee.
- The establishment employs ten or more people, and this includes factories, mines, plantations, ports, railways, shops and other establishments notified under the Act
- The employee has completed five years of continuous service with that employer
Coverage sticks. Once the Payment of Gratuity Act has applied to an establishment, it continues to apply even if headcount later falls below ten. That catches companies that scaled up and then shrank, and assume the obligation lapsed with the headcount.
The five-year condition is waived where employment ends because of death or disablement. In the case of death, gratuity is paid to the nominee or legal heir, and the service actually completed is what is used in the calculation.
Resignation and termination are treated the same way for eligibility. Someone who resigns after six years is entitled exactly as someone made redundant after six years is. The only situation where conduct affects the payment is forfeiture, which has narrow grounds and is dealt with further down.
Gratuity is not discretionary and not a reward for good behaviour on exit. Once the conditions are met it is a statutory debt, and an employer who withholds it because a laptop has not come back is on weak ground.
The five-year rule, and the four years 240 days argument
Continuous service is defined in the Act, and it does not mean an unbroken run of attendance. A year counts as continuous service where the employee actually worked 240 days in that year, or 190 days where they work below ground in a mine or in an establishment working fewer than six days a week. Authorised leave, layoff, strike that is not illegal and absence due to an employment injury count towards it.
That definition is what produces the long-running argument about whether four years and 240 days in the fifth year is enough. The Madras High Court, in a well-known decision, held that it is. Some employers apply that reading nationally, some apply it only where they are within that jurisdiction, and others insist on a full five years. There is no single settled national answer, and honest advice here is that it depends on where you are and who is arguing.
Practically: if you are an employee at four years and eight months and thinking about a move, the difference between leaving in month 56 and month 61 can be a substantial payment, and it is worth checking your own state and your own employer's practice before deciding. If you are an employer, decide your position once, apply it consistently, and take advice rather than deciding case by case, because inconsistency here is what turns into a claim.
What counts as salary
Last drawn basic pay plus dearness allowance. That is it.
Not gross salary, not CTC, and not basic plus every allowance. House rent allowance, conveyance, special allowance, overtime, bonus and reimbursements are all outside the calculation. For employees paid on commission on sales, commission is included.
This is where a salary structure built to minimise statutory contributions has a second effect that nobody mentions at the offer stage. A structure with basic at 30 per cent of gross produces a materially smaller gratuity after ten years than one with basic at 50 per cent, on the same total pay. Employees rarely work this out until they leave.
Counting years, and the six-month rule
Completed years, then round the remainder. A part year of more than six months counts as a full year. Six months or less is dropped.
- 7 years 7 months counts as 8 years
- 7 years 6 months counts as 7 years
- 7 years 5 months counts as 7 years
- 4 years 11 months counts as nothing, because the five-year threshold was never crossed
That last line is the one that hurts. Rounding applies to the calculation, not to eligibility. Someone at four years and eleven months does not round up into entitlement, which is why resignation timing near the five-year mark is worth thinking about carefully rather than emotionally.
Notice period served counts as service, since the employment continues until the last working day. Notice bought out rather than served is treated differently and is worth confirming against your own appointment letter.
The formula
For employees covered by the Act:
Gratuity = 15 × (last drawn basic + DA) × completed years ÷ 26
The 26 is the number of working days in a month, arrived at by excluding four Sundays. The 15 is fifteen days of wages for each year of service. Together they mean each year of service earns roughly 4.81 per cent of annual basic, which is the figure finance teams use to provision for gratuity through the year rather than meeting it as a cash shock when someone with long service leaves.
For establishments not covered by the Act, gratuity is not a statutory obligation at all. Where it is paid voluntarily or under contract, the common practice is to divide by 30 rather than 26, and to count only completed years without the six-month rounding. That produces a noticeably smaller figure on the same service, which is worth knowing before assuming the two are equivalent.
For piece-rated employees, the daily wage is the average of the last three months, excluding overtime. For seasonal establishments, the entitlement is seven days of wages for each season rather than fifteen.
Worked examples
| Situation | Basic + DA | Years used | Gratuity |
|---|---|---|---|
| Covered by the Act | ₹50,000 | 10 | ₹2,88,462 |
| 7 years 7 months, rounds up to 8 | ₹30,000 | 8 | ₹1,38,462 |
| 7 years 4 months, rounds down to 7 | ₹30,000 | 7 | ₹1,21,154 |
| Long service, senior salary | ₹1,00,000 | 25 | ₹14,42,308 |
| Above the ceiling, capped | ₹2,00,000 | 30 | ₹20,00,000 |
| Not covered by the Act, divisor of 30 | ₹30,000 | 7 | ₹1,05,000 |
The fifth row is the one worth pausing on. The formula produces ₹34,61,538 on those numbers, and the statutory ceiling cuts it to ₹20 lakh. An employer can pay more than the ceiling if it chooses, and the excess is then taxable in the employee's hands.
The last row shows the same seven years and the same salary producing ₹1,05,000 instead of ₹1,21,154, purely because the establishment sits outside the Act and uses 30 as the divisor with no rounding.
The ₹20 lakh ceiling and tax
The statutory ceiling has been ₹20 lakh since March 2018, raised from ₹10 lakh. Two things about it are commonly misunderstood.
It is a lifetime aggregate, not a per-employer limit. Exemption claimed on gratuity from an earlier employer reduces what is available at the next one, so someone who has already used ₹8 lakh of exemption has ₹12 lakh remaining, not a fresh ₹20 lakh.
And the exempt amount is the least of three figures, not simply the amount received. For an employee covered by the Act: ₹20 lakh, the gratuity actually received, or 15 days of salary for each completed year computed on the 15 over 26 basis. Whichever is smallest is exempt, and anything above it is taxed as salary income.
For employees not covered by the Act, the third limb is different: half a month's average salary, taken over the last ten months, for each completed year of service. Government employees receive gratuity fully exempt.
Gratuity paid to a nominee or legal heir on the death of an employee has its own treatment, and it is worth taking specific advice on that rather than applying the general rule, since the position differs from a payment made to the employee themselves.
When it must be paid, and what late payment costs
Within 30 days of gratuity becoming payable. That obligation sits with the employer regardless of whether the employee has applied for it.
This is the part most often got wrong in practice. Employers wait for a Form I application and treat the clock as starting when it arrives. The Act requires the employer to determine the amount and give notice to the employee and the controlling authority as soon as it becomes payable. Where payment is delayed beyond 30 days, simple interest is payable for the delayed period.
- Nomination is made in Form F, and an employee is required to file it after completing one year of service
- The employee or nominee may apply in Form I, but the employer's duty to determine and pay does not depend on it
- The employer gives notice of the amount in Form L, or notice of rejection with reasons in Form M
- A dispute goes to the controlling authority under the Act rather than to a civil court
Do not withhold gratuity as leverage for unreturned assets or an unserved notice period. Recover what is genuinely due through the settlement, showing the deduction, and pay the gratuity. Holding a statutory payment to force compliance on a separate matter is where employers lose these cases.
When gratuity can be forfeited
The grounds are narrow and specific, and forfeiture requires that the employment was actually terminated for the conduct in question.
Where an employee's services are terminated for any act, wilful omission or negligence causing damage or loss to the employer, gratuity may be forfeited to the extent of that damage. Where termination is for riotous or disorderly conduct or any act of violence, or for an offence involving moral turpitude committed in the course of employment, gratuity may be forfeited wholly or partially.
What that does not cover is poor performance, leaving without serving notice, joining a competitor, or a general falling out. Forfeiture on those grounds is not available, and attempting it converts a clean exit into a claim the employer is likely to lose.
Gratuity in CTC, and why that annoys people
Many Indian employers include a gratuity component in the CTC figure quoted at offer stage, usually 4.81 per cent of basic. It is defensible as a statement of cost, because that is genuinely what the employer expects to pay over time.
It is also the source of a lot of resentment, for a reasonable cause. An employee who leaves at three years has had that amount counted as part of their compensation for three years and receives none of it, because the entitlement never vested. From the employer's side nothing improper happened. From the employee's side, a number presented as part of their package turned out to be conditional on something nobody explained at the time.
If you include it, say plainly in the offer conversation that it vests at five years and is not payable before then. It costs nothing to explain and it removes an argument at exit, which is exactly when nobody has patience for one.
Frequently asked questions
What is the gratuity calculation formula?
Gratuity equals 15 multiplied by last drawn basic plus dearness allowance, multiplied by completed years of service, divided by 26. Establishments outside the Payment of Gratuity Act commonly use 30 as the divisor instead.
What is the eligibility for gratuity in India?
Five years of continuous service with an employer that has ten or more employees. The five-year condition does not apply where employment ends due to death or disablement.
Is gratuity payable after 4 years and 240 days?
It is disputed. The Madras High Court has held that four years and 240 days in the fifth year qualifies, and some employers apply that nationally while others require a full five years. There is no settled national answer, so check your state and take advice.
Is gratuity calculated on basic salary or gross salary?
On last drawn basic pay plus dearness allowance, and commission on sales where applicable. HRA, conveyance, special allowance, bonus and reimbursements are excluded, which is why a low basic reduces gratuity.
How are part years counted for gratuity?
More than six months counts as a full year, six months or less is dropped. So seven years and seven months is calculated as eight years. Rounding applies to the calculation only, not to crossing the five-year eligibility threshold.
What is the maximum gratuity payable?
The statutory ceiling is ₹20 lakh, in force since March 2018. An employer may pay more voluntarily, and the excess is taxable in the employee's hands.
Is gratuity taxable?
It is exempt up to the least of ₹20 lakh, the amount actually received, or 15 days of salary for each completed year. The ₹20 lakh exemption is a lifetime aggregate across employers, not a fresh limit at each job. Government employees receive it fully exempt.
How long does an employer have to pay gratuity?
Within 30 days of it becoming payable, and the duty to determine and pay sits with the employer whether or not the employee applies. Simple interest is payable on delayed amounts.
Can an employer refuse to pay gratuity?
Only on the narrow forfeiture grounds in the Act, where employment was terminated for damage caused by the employee, riotous or disorderly conduct, or an offence involving moral turpitude in the course of employment. Poor performance or not serving notice are not grounds.
For an employee, the two numbers that decide everything are your basic plus DA and your completed years, and the second one is worth counting carefully if you are anywhere near five years. For an employer, the two things worth fixing are provisioning at roughly 4.81 per cent of basic through the year rather than absorbing it as a shock, and paying within 30 days without waiting to be asked.
