What is gratuity and who pays it?
Gratuity is a statutory lump-sum payment made by an employer to an employee as a recognition of long and dedicated service. It is not a bonus or a gift at the employer's discretion — it is a legal right governed by the Payment of Gratuity Act, 1972. The Supreme Court in Indian Hume Pipe Co. Ltd. v. Its Workmen described the principle clearly: by service over a long period, the employee is entitled to claim a certain amount as a retirement benefit.
Gratuity is paid entirely by the employer — there is no employee contribution. It is paid as a one-time amount when employment ends after 5 years of continuous service, whether through resignation, retirement, superannuation, death, or disablement.
Who is covered by the Payment of Gratuity Act?
The Act applies to:
- Factories, mines, oilfields, plantations, ports, and railway companies — regardless of employee count
- Shops and other establishments with 10 or more employees on any day in the preceding 12 months
- Educational institutions — following the 2009 amendment which included teachers
Once an establishment crosses the 10-employee threshold, the Act continues to apply even if headcount later falls below 10. Most IT companies, banks, hospitals, and commercial establishments in India are covered.
Who is NOT covered?
- Apprentices (expressly excluded under Section 2(e))
- Central and state government employees — they are covered under separate government gratuity rules (with a ₹25 lakh cap for central government employees as of January 2024)
- Employees of establishments with fewer than 10 employees — though many such employers pay gratuity voluntarily or under company policy
The Supreme Court in IREL (India) Limited v. P.N. Raghava Panicker held that an employer cannot designate an employee as a "trainee" while extracting regular work and then deny gratuity. If you are doing regular work, you are an employee for gratuity purposes regardless of what your appointment letter says your designation is.
The 5-year rule — and the 4-year-240-day shortcut
Under Section 4(1) of the Payment of Gratuity Act, gratuity is payable after the employee has rendered continuous service for not less than five years. But "five years" has a judicial nuance that many employees approaching the 5-year mark do not know about.
The 240-day rule — Supreme Court
Section 2A of the Act defines "continuous service." Under this section, an employee is deemed to be in continuous service for a year if they have actually worked for:
- 240 days in establishments working 6 days a week, or
- 190 days in establishments working 5 days a week
The Supreme Court in Surendra Kumar Verma v. Central Government Industrial Tribunal applied this to the 5-year requirement: an employee who has completed 4 years and 240 working days (or 190 days for 5-day week establishments) is deemed to have completed 5 years of continuous service. This is not a loophole — it is the statutory and judicial interpretation of continuity.
Practical implication: If you resigned after 4 years and 9 months and your employer argues you haven't completed 5 years — check your working days. If you have 240+ working days in year 5, you are eligible. This is worth fighting for.
When the 5-year rule is waived
Gratuity is payable regardless of service duration in two situations:
- Death — paid to the nominated beneficiary (or legal heirs if no nomination was made)
- Disablement due to accident or disease — paid to the employee regardless of service length
Fixed-term employees — new 1-year rule (November 2025)
The Code on Social Security, 2020, which came into effect on November 21, 2025, introduced a critical change for fixed-term employees. Under the new Code, fixed-term contract employees are eligible for pro-rata gratuity after just 1 year of continuous service — down from the 5-year requirement for regular employees. The calculation formula remains the same; only the eligibility threshold changes. This covers employees on fixed-term contracts in IT, manufacturing, consulting, and other project-based roles where 5-year tenures were rare.
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Free, confidential. Our AI will calculate your gratuity entitlement and tell you exactly what to do if your employer is stalling.The gratuity formula — worked examples
The statutory formula under Section 4(2) of the Payment of Gratuity Act is:
Where: Salary = Basic + Dearness Allowance only | 26 = working days per month | 15 = days per year
What counts as "last drawn salary"?
This is the most common calculation error — using the wrong salary figure.
| Component | Included in gratuity calculation? |
|---|---|
| Basic salary | ✓ Yes — always included |
| Dearness Allowance (DA) | ✓ Yes — included if applicable (more common in PSU/government-linked organisations) |
| HRA (House Rent Allowance) | ✗ No |
| Special allowance / flexi pay | ✗ No |
| Performance bonus / variable pay | ✗ No |
| LTA, medical allowance | ✗ No |
| Employer's PF contribution | ✗ No |
| Gross salary / CTC | ✗ No — never use these figures |
Worked examples
Example 1 — IT professional, 8 years service
Basic salary: ₹60,000/month | Service: 8 years 4 months → round down to 8 years (less than 6 months)
Gratuity = (₹60,000 × 15 × 8) ÷ 26 = ₹2,76,923
Example 2 — Senior manager, 12 years 7 months
Basic salary: ₹1,20,000/month | Service: 12 years 7 months → round up to 13 years (more than 6 months)
Gratuity = (₹1,20,000 × 15 × 13) ÷ 26 = ₹9,00,000
Example 3 — High earner hitting the ceiling
Basic salary: ₹2,00,000/month | Service: 20 years
Calculated = (₹2,00,000 × 15 × 20) ÷ 26 = ₹23,07,692 — but capped at ₹20,00,000
Example 4 — Non-Act-covered employer (fewer than 10 employees)
Basic salary: ₹40,000/month | Service: 7 years 8 months → 8 years (>6 months, rounded up under contract)
Gratuity = (₹40,000 × 15 × 8) ÷ 30 = ₹1,60,000
Note the divisor is 30 (not 26) for non-covered employers, and partial years are not rounded up — check your specific employment contract.
The rounding rule
| Last year of service | What counts (Act-covered) |
|---|---|
| Less than 6 months | Ignored — round down |
| 6 months or more | Counts as a full year — round up |
The ₹20 lakh ceiling and tax treatment
The statutory ceiling
Section 4(3) of the Payment of Gratuity Act caps the maximum gratuity at ₹20,00,000 for private sector employees covered under the Act. This was doubled from ₹10 lakh by the 2018 amendment. The 2018 amendment also empowered the central government to revise this ceiling by notification — without needing a parliamentary amendment — giving flexibility to increase it as wages rise. As of April 2026, the ceiling remains ₹20 lakh for private sector employees.
For central government employees: the ceiling was raised to ₹25 lakh in January 2024.
Important: the ceiling is on what the employer is legally required to pay. An employer can voluntarily pay more (as "ex-gratia") — many large companies have higher gratuity policies for senior employees. The amount above ₹20 lakh is taxable in the employee's hands.
Tax treatment — Section 10(10) of the Income Tax Act
| Category of employee | Tax exemption | Taxable amount |
|---|---|---|
| Government employees (central/state) | Fully exempt — no limit | Nil |
| Private sector — Act-covered | Exempt up to ₹20,00,000 | Amount above ₹20 lakh taxable as salary |
| Private sector — Not Act-covered | Exempt up to ₹10,00,000 (lower limit) | Amount above ₹10 lakh taxable as salary |
The ₹20 lakh tax exemption is a lifetime aggregate limit under Section 10(10) of the Income Tax Act — not ₹20 lakh per employer per job. If you have received gratuity from multiple employers over your career (e.g., ₹8 lakh from employer A and ₹14 lakh from employer B), the total tax-free amount across all employers combined is ₹20 lakh. The cumulative excess is taxable. Maintain records of gratuity received from each employer.
Can gratuity be forfeited?
Yes — Section 4(6) of the Payment of Gratuity Act allows forfeiture in specific circumstances. This is a critical protection employers must understand and employees must guard against.
Grounds for forfeiture
| Section 4(6) | Ground | Extent of forfeiture |
|---|---|---|
| 4(6)(a) | Wilful omission or negligence causing damage or destruction to employer's property | Partial — to the extent of the damage/loss |
| 4(6)(b)(i) | Termination for riotous or disorderly conduct, or any act of violence during employment | Whole or partial |
| 4(6)(b)(ii) | Termination for any act constituting an offence involving moral turpitude, committed during employment | Whole or partial |
The February 2025 Supreme Court ruling on forfeiture
The Supreme Court in Western Coal Fields Limited v. Manohar Govinda Fulzele (February 2025) settled a long-running dispute about whether criminal conviction is required before an employer can forfeit gratuity under Section 4(6)(b). The Court held: criminal conviction is NOT necessary. An employer can forfeit gratuity after a proper domestic enquiry that establishes the act — criminal conviction in a court of law is not a prerequisite. This ruling clarifies the scope for employers but also emphasises that forfeiture must follow a proper enquiry, not be imposed arbitrarily.
What forfeiture cannot cover
- Poor performance or inefficiency — not a ground for forfeiture
- Resignation without notice — not a ground for gratuity forfeiture (the employer's remedy is to deduct notice period salary, not gratuity)
- Minor disciplinary infractions — do not rise to the level of Section 4(6) grounds
- Forfeiture cannot exceed the actual damage caused (under 4(6)(a)) — not a blank cheque
Nomination — who receives gratuity if you die?
Under Section 6 of the Payment of Gratuity Act, every employee must file a nomination form (Form F) with their employer within 30 days of completing one year of service. The nomination specifies who will receive the gratuity in the event of the employee's death.
Rules for nomination
- If the employee has a family (spouse, children, parents) — the nominee must be a family member. A nomination in favour of a non-family member is invalid if the employee has family.
- If the employee has no family at the time of nomination, any person can be nominated — but the nomination becomes invalid if the employee subsequently acquires a family (marries, has children) and must be revised.
- Multiple nominees can be named with specified shares (e.g., 50% to spouse, 50% to mother)
- Nomination can be changed at any time by submitting a fresh Form F
If no nomination was made
If an employee dies without having made a nomination, gratuity is paid to the legal heirs under succession law. If any legal heir is a minor, their share is deposited with the Controlling Authority who invests it until the minor attains majority.
Employer refusing to pay or delaying gratuity?
Book a verified employment lawyer for ₹99. They'll file the claim with the Controlling Authority and get you interest on the delayed amount.How to claim gratuity — step by step
Step 1: Submit Form I (Application for Gratuity)
File a written application in Form I (under the Payment of Gratuity (Central) Rules, 1972) with your employer. You can submit this up to 30 days before your separation date or within 30 days after. The employer must acknowledge receipt.
Step 2: Employer calculates and issues Form L
Within 15 days of receiving your application, the employer must issue a notice in Form L specifying the amount of gratuity payable. If the employer disputes eligibility or amount, they must issue Form M (notice of rejection) with reasons.
Step 3: Payment within 30 days
The employer must pay the gratuity amount within 30 days of it becoming due. Payment is typically made via bank transfer. If the gratuity is not paid within 30 days without a reasonable cause, the employer must pay simple interest at 10% per annum from the due date.
Step 4: If employer disputes or refuses
If the employer rejects your claim (Form M) or simply doesn't pay:
- File an application before the Controlling Authority under the Act — typically the Regional Labour Commissioner or the Assistant Labour Commissioner for your area
- The Controlling Authority conducts an inquiry and can order payment with interest
- Either party can appeal to the Appellate Authority (typically the Labour Court or Industrial Tribunal)
- Further appeals lie to the High Court
- Wilful non-payment is also a criminal offence under Section 9 — punishable by imprisonment from 6 months to 2 years plus fines
Documents you need
- Form I (application for gratuity) — get it from HR or download from Ministry of Labour
- Copy of offer letter / appointment letter showing date of joining
- Last drawn salary slip (showing basic salary clearly)
- Resignation acceptance letter or retirement order
- Relieving letter and/or experience certificate
- Bank account details for payment
Gratuity — questions people actually ask
I resigned at 4 years 10 months. Am I eligible?
Possibly — and this is worth checking carefully. The standard answer is "no, you need 5 years." But under Section 2A and the Supreme Court's ruling in Surendra Kumar Verma, if you have completed 240 working days in your 5th year (or 190 days if your employer has a 5-day week), you are deemed to have completed 5 years. Count your actual working days in year 5 — excluding leaves without pay but including paid leave, sick leave (with pay), and weekly offs. If you have 240+ days, you have a strong legal argument for gratuity.
Does my employer have to buy a gratuity insurance policy?
Under Section 4A of the Payment of Gratuity Act, every employer with 10+ employees must obtain an approved gratuity insurance or maintain a recognised gratuity fund. In practice, most large companies use LIC's Group Gratuity scheme or maintain an approved gratuity trust. However, the insurer/fund being in place does not affect your right — gratuity is your statutory right against the employer, regardless of whether the employer has insurance. If the employer cannot pay because they didn't maintain a fund, the employer remains personally liable.
What happens to my gratuity if the company shuts down?
Gratuity is a statutory preferential debt — it ranks above other unsecured debts in winding up or insolvency proceedings. Under the Insolvency and Bankruptcy Code, employee dues including gratuity are operational creditor claims and rank above financial creditors in the waterfall of payments. However, recoveries in insolvency are uncertain — employees should file their claims with the Resolution Professional immediately upon insolvency commencement.
Can my employer deduct anything from gratuity?
Gratuity can only be reduced through the lawful forfeiture mechanism under Section 4(6) — for the specific grounds discussed above. The employer cannot deduct notice period shortfall, loan recoveries, or disciplinary fines from gratuity without following the Section 4(6) process. Loans given by the employer can be recovered from other components of F&F settlement, but not from gratuity without lawful authority.
I received gratuity from a previous employer. Does that affect what my current employer pays?
No — each employer pays gratuity independently based on your service with them. Past gratuity receipts don't reduce what you're owed from your current employer. The only place past gratuity matters is in calculating your tax exemption: the ₹20 lakh lifetime limit under Section 10(10) is aggregate across all employers. So if you received ₹12 lakh from Employer A, only ₹8 lakh from Employer B is tax-free.
Is gratuity included in my CTC?
Yes — most Indian companies include an estimated gratuity provision in the CTC structure, typically calculated as (Basic × 15 × 1) ÷ 26, representing one year's accrual. This is an accounting provision, not an actual payment — the actual gratuity is only paid on separation after 5 years. If your CTC includes a gratuity component, deduct it to understand your net-in-hand and actual take-home. The CTC inclusion does not reduce what you are legally owed on separation.