What is Gratuity? Calculation, Duration, and Applicability in India

Key Takeaways

• Gratuity is an employer-funded employment benefit arising when a qualifying employment relationship ends.
• Five years of continuous service is the general requirement, subject to defined statutory exceptions.
• Monthly-rated employees generally receive 15 days of eligible wages for each counted service year.
• The standard statutory ceiling is ₹20 lakh, although separate government service rules can prescribe different amounts.
• Employers must ordinarily release the determined benefit within 30 days of its becoming payable.

When employees leave a company, they often know their final salary but are unsure how much gratuity they are entitled to receive. The amount depends on qualifying service, eligible wages and the circumstances in which employment ends. This guide explains gratuity coverage, qualifying service, the wage calculation, payment deadlines, and taxation under the rules applicable in 2026.

What is Gratuity in India

Gratuity is a lump-sum benefit paid by an employer to an eligible employee when their employment ends under specified conditions. It becomes an enforceable entitlement when the employment relationship ends under conditions recognized by law. Gratuity is funded by the employer and is not deducted from the employee's salary.

For gratuity in India, the principal statutory framework is Chapter V of the Code on Social Security, 2020, implemented from November 21, 2025. It differs from wages, provident fund balances, and performance bonuses. The amount is generally calculated using the employee's eligible wages and length of service. Some government personnel receive retirement benefits under their respective service rules instead of this chapter.

Which Employers and Establishments Must Provide Gratuity

Gratuity provisions generally apply to factories, mines, oilfields, plantations, ports and railway companies, as well as shops and establishments meeting the ten-employee threshold. Chapter V covers specified industries directly and applies an employee threshold elsewhere.

The main coverage categories are as follows:

• Specified establishments include factories, mines, oilfields, plantations, ports, and railway companies covered by the Code.
• Shops and other establishments qualify when they employ, or employed, at least ten people on any day during the preceding twelve months.
• Notified establishments may also enter the framework through an applicable government notification.
• Continuing coverage generally remains in effect after an establishment becomes covered, even when its workforce subsequently falls below the threshold.

An organization may also promise a better benefit through an enforceable award, agreement, or employment contract. These terms remain relevant alongside the statutory minimum.

Who Is Eligible to Receive Gratuity

Gratuity generally becomes payable when an eligible employee resigns, retires or leaves employment under other circumstances recognised by law.

Retirement or Superannuation

Employees who retire or reach the age of superannuation are generally entitled to gratuity after completing the required continuous service. Other recognized retirement arrangements may qualify.

Resignation or Termination

Resignation preserves entitlement where service conditions are met. Termination can trigger payment, subject to limited statutory forfeiture grounds.

Death or Disablement

An employee's death or qualifying disablement due to accident or disease removes the ordinary five-year condition. In a death case, payment passes to the nominee or, without a nomination, the legal heirs. Special safeguards apply when the beneficiary is a minor.

Other Recognized Events

Fixed-term contract expiry is specifically recognized. Additional events require a formal government notification, not an internal company policy.

Gratuity Eligibility Under the 2026 Rules

How Long Must an Employee Work to Qualify

The general gratuity duration requirement is five years of continuous service with the employer. Continuity can survive several legally recognized interruptions.

Here's how continuous service is determined:

What Counts as Continuous Service

Periods involving sickness, accidents, authorized leave, layoffs, qualifying industrial action, or work stoppages beyond the employee's control can retain continuity. Unauthorised absence does not automatically break continuous service. A break may arise where a valid order is passed in accordance with the applicable standing orders or service rules.

How Are Working Days Counted

If an employee's service was interrupted, the law provides working-day tests to determine whether the period can still count as continuous service. The annual threshold is generally 240 days, or 190 days for underground mine workers and employees in establishments working fewer than six days weekly. Corresponding six-month thresholds are 120 and 95 days.

Specified paid leave and maternity periods also count. For qualifying maternity leave, the statutory counting limit extends to 26 weeks. The relevant working-day test applies to the prescribed reference period, not an arbitrary financial year.

Does Four Years and 240 Days Qualify

The expression reflects judicial interpretations of continuous service in particular cases. Completing four years and 240 days does not automatically establish gratuity eligibility in every case. The outcome depends on the applicable continuous-service provisions and relevant judicial interpretation. Employment records and relevant judicial decisions determine any earlier entitlement.

Which Salary Components Count Toward Gratuity

A final payslip is not necessarily the statutory wage base. Under the revised wage definition, basic pay, dearness allowance and retaining allowance are included. Certain excluded allowances may also affect gratuity calculations when the 50% rule applies.

Included Wage Components

Basic pay, dearness allowance, and retaining allowance, where applicable, form the core wage components. The last drawn eligible monthly amount is the starting point for the standard calculation. The actual nature of each payment and the statutory wage definition determine whether it is included, excluded or subject to the 50% add-back.

Excluded Allowances and Benefits

Specified exclusions include items such as house rent allowance, certain conveyance payments, overtime allowance, and employer provident fund contributions. Annual performance-based incentives, ESOPs, and genuine expense reimbursements are generally excluded from statutory wages. However, allowances covered by the 50% add-back rule must be examined separately. Cost-to-company classification alone does not establish eligible wages.

How Does the 50% Rule Work

Under the Code on Social Security, 2020, basic pay, dearness allowance and retaining allowance form the core wage components. If the relevant excluded allowances and payments exceed 50% of remuneration, the excess is added back when calculating statutory wages.

For example, assume an employee has the following monthly remuneration:

In this example, ₹6,000 is added to the original ₹24,000 wage base, increasing the statutory wage amount to ₹30,000.

The calculation depends on the nature of each salary component. Gratuity, retrenchment compensation and other payments excluded from the relevant remuneration calculation should not be treated as ordinary monthly allowances merely because they appear in a company's CTC structure.

This revised wage definition applies to gratuity calculations governed by the Code from November 21, 2025.

How Is Gratuity Calculated in India

For monthly-rated employees, calculations use last drawn eligible wages and counted service years. The formula and service-rounding rules determine the resulting amount.

Gratuity Calculation Formula

Gratuity = (Last drawn eligible monthly wages × 15 × counted service years) ÷ 26

The formula provides 15 days' wages for each eligible year of service. Monthly wages are divided by 26 to calculate the daily wage rate. Monthly wages are divided by 26 to calculate the applicable daily rate.

How Is a Partial Year Counted

After minimum eligibility is satisfied, an additional service period exceeding six months counts as another year under the standard calculation. For example, seven years and eight months produces eight counted years. Seven years and exactly six months does not meet the wording requiring a period exceeding six months.

For employees subject to the general five-year requirement, rounding a partial year affects the gratuity amount but does not independently establish eligibility.

Gratuity Calculation Example

Assume an employee leaves after seven years and eight months, has met the eligibility rules, and draws correctly determined eligible monthly wages of ₹52,000.

This is the calculated gratuity before applying any relevant statutory ceiling or tax deduction limits. For gratuity becoming payable on or after November 21, 2025, the revised wage definition applies to the last-drawn wage calculation, including where the employee's service began before that date.

How Do Rules Change for Special Employment Categories

Eligibility and calculation may differ for fixed-term, contractor-supplied, piece-rated and seasonal employees. The following employment categories require separate treatment.

Directly Employed Fixed-Term Workers

A fixed-term employee works under a written contract for a specified period and is engaged directly by the employer. A directly employed fixed-term employee generally qualifies for gratuity after completing at least one year of service under a qualifying fixed-term contract. The usual five-year requirement does not apply when such employment ends on expiry of the contract. The Code provides for proportionate gratuity for fixed-term employees. The applicable 2026 rules also address how qualifying additional service periods are counted, so employers should verify the final amount using the relevant rules.

Employees Supplied Through Contractors

Workers supplied by a contractor are treated differently from directly employed fixed-term staff. Where workers are employed through a contractor, the contractor is generally responsible for statutory gratuity after the applicable qualifying service. This differs from direct fixed-term employment, and the actual employment arrangement must be considered. Working at a client's premises does not, by itself, make a contractor's employee a directly employed fixed-term worker of that client.

Piece-Rated and Seasonal Employees

For piece-rated staff, daily wages are based on average wages earned during the preceding three months, excluding overtime payments. Employees working in seasonal establishments who are not employed throughout the year generally receive seven days' wages for each qualifying season. Working journalists covered by the specified statutory definition have a three-year qualifying-service rule.

What Is the Maximum Gratuity Amount in India

The general statutory gratuity ceiling is ₹20 lakh. Where the formula produces a higher amount, the statutory obligation is generally capped at ₹20 lakh, unless enforceable terms provide a more favourable benefit.

Better terms under a valid award, agreement, or employment contract may create an entitlement beyond the statutory minimum. Eligible Central Government employees governed by the Central Civil Services (Pension) Rules, 2021, or the corresponding NPS gratuity rules have a separate ₹25 lakh retirement and death gratuity ceiling, effective January 1, 2024. The applicable service rules determine the final amount.

Is Gratuity Taxable in India

Treatment varies with employee category. An employer may pay the full gratuity due, but part of the amount may still be taxable if it exceeds the applicable deduction limit.

For tax years beginning on or after April 1, 2026, Section 19 of the Income-tax Act, 2025, provides deductions for specified gratuity receipts. The tax treatment depends on the category of employee and the applicable statutory conditions.

The payment ceiling and tax deduction limit serve different purposes. A valid higher contractual benefit may be partly taxable, while earlier exempt receipts can reduce remaining relief.

When Must an Employer Pay Gratuity

Gratuity becomes payable when a qualifying employment-ending event occurs, and the applicable service conditions have been met. Internal clearance procedures do not automatically extend the statutory gratuity payment deadline. Pending administrative formalities, such as asset clearance or final payroll processing, do not by themselves postpone the date on which gratuity becomes payable.

Employers must meet the following obligations:

Determining the Amount and Giving Notice

The employer must calculate gratuity when it becomes payable, whether or not the employee has submitted a claim. The amount must be communicated through the required notice. Written notice of the calculation must be issued to the entitled person and also to the competent authority.

Meeting the 30-Day Payment Deadline

Under Section 56 of the Code on Social Security, gratuity must ordinarily be paid within 30 days of the date it becomes payable. An employer's own settlement timetable cannot override it, and a late final payslip does not create a fresh payment date.

Paying Interest on Delayed Gratuity

If gratuity is not paid within the statutory period, the employer generally becomes liable to pay simple interest from the date it became payable until the date of payment. Simple interest runs from the date gratuity became payable until it is actually released, subject to the statutory rate restriction. Interest may be waived only where the delay was caused by the employee and the employer obtained written permission from the competent authority on that ground.

Resolving Disputes Over Payment

If the gratuity amount is disputed, the employer must deposit the amount it acknowledges as payable with the competent authority. That amount must be deposited with the competent authority. The authority can then decide questions of eligibility, calculation, or recipient and direct payment of any additional amount found due.

How Can Employees Apply for Gratuity?

An eligible employee can apply to the employer for gratuity after a qualifying employment-ending event. Under the Social Security (Central) Rules, 2026, the process generally involves:

1. Submit the application: Apply using Form IV, ordinarily within 30 days of gratuity becoming payable. Electronic and specified physical submission methods are permitted.
2. Employer verification: The employer verifies eligibility, continuous service and the applicable wage calculation.
3. Receive the notice: Under the Central Rules, the employer generally issues Form V within 15 days of receiving the application, stating the payable amount or reasons for rejecting the claim.
4. Receive payment: The employer must comply with the statutory payment deadline. Payment may be made by bank credit or demand draft under the Central Rules.
5. Raise a dispute if necessary: Where a claim is rejected, underpaid or not processed, the employee may approach the competent authority through the applicable prescribed process.

Employers must determine gratuity when it becomes payable even if an employee has not submitted an application. Employees should retain their appointment letter, salary records, employment dates and relevant exit documentation.

When Can an Employer Forfeit Gratuity

Poor performance or an ordinary employment dispute is not, by itself, a statutory ground for forfeiting gratuity. Forfeiture requires specified conduct linked to termination.

The permitted grounds are limited to the following situations:

• Property damage or loss caused through an employee's act, willful omission, or negligence can justify forfeiture only to the extent of the proven damage or loss.
• Violence or serious disorderly conduct may justify partial or full forfeiture when employment is terminated for that conduct.
• An offense involving moral turpitude may support partial or full forfeiture when committed during employment and linked to termination under the statutory provision.

An employer seeking forfeiture must establish the statutory grounds and justify the amount being forfeited. Resignation or unsupported misconduct allegations cannot replace statutory conditions.

Final Thoughts

To calculate gratuity correctly, employees and employers need accurate service records, eligible wage details and the effective employment-ending date. Each factor answers a separate legal question, and an error in any one can change the final amount. Employers and employees should apply the governing rules to the actual service records before settling the claim.

FAQs

1. Does the Probation Period Count Toward Gratuity?

Yes, probation generally counts toward continuous service when an employee is working under a regular employment arrangement. Service begins from the actual joining date, even if permanent confirmation happens several months later. Probation generally counts towards continuous service from the employee's joining date, provided the employment meets the applicable statutory requirements.

2. Is the Notice Period Included in Gratuity Service?

Yes, a notice period counts when employment continues until the official relieving date. However, receiving payment in lieu of notice after employment has ended does not automatically extend the service period. The relevant service period ordinarily ends on the effective date of termination, not automatically on the date of the employee's last physical attendance.

3. Are Part-Time Employees Eligible for Gratuity in India?

Part-time employees can qualify when they work for wages in a covered establishment and satisfy the applicable service conditions. Working fewer hours does not independently remove their entitlement. Part-time employees are not automatically excluded from gratuity because they work fewer hours. Eligibility depends on whether they qualify as employees under the Code and meet the applicable service conditions.

4. Are Apprentices and Trainees Eligible for Gratuity?

Apprentices engaged under the Apprentices Act, 1961, are excluded from the employee definition under the Code on Social Security. However, someone designated as a trainee may qualify if the actual arrangement constitutes regular wage-paid employment. Apprentices engaged under the Apprentices Act, 1961, are excluded. A person called a ‘trainee’ may still qualify if the actual arrangement is employment for wages rather than a statutory apprenticeship.

5. Does a Transfer Between Company Branches Affect Gratuity?

An internal transfer generally preserves continuous service when the employee remains employed by the same legal entity. Moving between offices, departments, or cities does not automatically restart the service period. If the transfer involves a different legal employer, eligibility may depend on the transfer terms, recognition of past service and continuity of the employment relationship.

6. Can Employees Claim Gratuity Several Years After Leaving?

Yes. Under the Social Security (Central) Rules, 2026, employees should ordinarily apply within 30 days of gratuity becoming payable. However, a delayed application can still be considered when the applicant provides sufficient reasons for the delay. An otherwise valid gratuity claim does not become invalid solely because the application was submitted late.

7. Can Employees Apply for Gratuity Online?

Yes. Eligible employees can submit gratuity applications electronically under the applicable rules. For establishments governed by the Social Security (Central) Rules, 2026, the prescribed application is Form IV, which may be submitted electronically, delivered personally or sent by registered speed post. The submission process depends on the rules applicable to the establishment; there is not necessarily a single online portal for every employer.

8. Is Gratuity Payable Without an Employer's Gratuity Fund?

Yes, statutory gratuity remains payable even when an employer has not maintained a separate gratuity fund. The employer's responsibility exists independently of its funding arrangement. Yes. An employee's statutory gratuity entitlement does not depend on whether the employer maintains a separate gratuity fund. The employer remains responsible for paying the amount due.

9. What Happens to Gratuity When a Company Shuts Down?

Company closure does not automatically cancel an employee's accrued gratuity entitlement. Eligible employees can pursue their claims through the applicable legal process. If the company enters insolvency or liquidation, employees should submit their gratuity claims through the relevant process. The Code provides protections for gratuity dues, but actual recovery depends on the applicable insolvency proceedings and available assets.

10. Can a Court Attach Gratuity for Personal Debts?

Section 151 of the Code on Social Security protects qualifying amounts due under the gratuity chapter from attachment for an employee's personal debts. The treatment of money after it has been received may require separate legal consideration. Section 151 of the Code on Social Security, 2020, protects covered benefits from such recovery proceedings. The treatment of funds after receipt may require separate legal consideration.