What is gratuity and who pays it?
Gratuity is a lump-sum payment an employer makes to an employee in recognition of their service. It is not a bonus or a gift at the employer's discretion — it is a legal right. Since 21 November 2025, that right comes from the Code on Social Security, 2020. Section 164 of the Code replaced the Payment of Gratuity Act 1972, and the gratuity rules now sit in section 53. If a payslip, HR policy or website still cites the 1972 Act, treat it with care: the basic idea is the same, but the rules have changed — most importantly for fixed-term employees and for what counts as wages.
Gratuity is paid entirely by the employer — there is no employee contribution. It is paid as a one-time amount when employment ends after qualifying service, whether through resignation, retirement, superannuation, death or disablement.
Who is covered by the Code's gratuity rules?
The gratuity rules apply to establishments with 10 or more employees. Most IT companies, banks, hospitals and larger commercial businesses in India cross that threshold.
Who is NOT covered?
- Employees of establishments with fewer than 10 employees — though many such employers pay gratuity voluntarily or under company policy, so check your contract
- Central and state government employees — they are covered by separate government gratuity rules, with their own ceiling
What matters is whether you actually work as an employee. If your employer calls you a "trainee" or "consultant" while you do regular work, don't accept that label as the end of the question — get advice before you give up a gratuity claim.
What is the minimum service period for gratuity in India? 5 years — or 1 year for fixed-term employees
Under the Code on Social Security, 2020, permanent employees qualify after 5 years of continuous service, and fixed-term employees qualify after 1 year, on a pro rata basis. The service condition does not apply if employment ends because of death or disablement.
For a permanent employee, gratuity is payable after at least 5 years of continuous service. For a fixed-term employee, it is payable after 1 year, worked out pro rata for the period served. For both, the service condition is waived if employment ends because of death or disablement.
What if you are a few months short of 5 years?
Many permanent employees resign at 4 years and 8 or 9 months and assume they have lost gratuity. The Code has its own rules on what counts as continuous service, and how they apply to a final year of 8 or 9 months depends on the days you actually worked and the facts of your case. The rule that more than 6 months counts as a full year is part of the calculation — don't assume it also settles eligibility.
Practical implication: if you are close to 5 years, don't accept "you're not eligible" without checking. Ask HR for your attendance record for the final year and get advice before you resign or sign a settlement.
Can gratuity be paid before 5 years of service?
Yes, in three situations: if you are a fixed-term employee with at least 1 year of service, paid pro rata; if employment ends because of your death, when gratuity goes to your nominee or heirs; and if it ends because of disablement.
Gratuity can be paid before 5 years in these situations:
- Fixed-term contract — after 1 year of service, pro rata
- Death — paid to the nominated beneficiary (or legal heirs if no nomination was made)
- Disablement — paid to the employee regardless of length of service
Fixed-term employees — the 1-year rule (November 2025)
The Code on Social Security, 2020, in force since 21 November 2025, changed the position for fixed-term employees. If you are on a fixed-term contract, you qualify for gratuity after 1 year of service, and the amount is worked out pro rata for the period you served. The formula is the same as for permanent employees; only the eligibility threshold is different. This matters most in IT, manufacturing, consulting and other project-based roles where contracts rarely ran for 5 years.
How is gratuity calculated in India? The formula — with worked examples
Gratuity = (monthly wages ÷ 26) × 15 × completed years of service. Under the Code on Social Security, 2020, wages means basic pay, dearness allowance and retaining allowance — and if your excluded allowances are more than 50% of your total pay, the excess is added back to wages. More than 6 months in your final year counts as a full year.
The formula under section 53 of the Code on Social Security, 2020 gives you 15 days' wages for every completed year of service:
Where: wages = basic + dearness allowance + retaining allowance (plus any add-back under the 50% rule) | 26 = working days per month | 15 = days' wages per year
What counts as wages?
This is where most calculations go wrong. The Code defines wages narrowly — but with a safeguard that stops employers keeping basic pay artificially low to cut gratuity.
| Component | Counts as wages for gratuity? |
|---|---|
| Basic pay | ✓ Yes — always included |
| Dearness allowance (DA) | ✓ Yes — if paid |
| Retaining allowance | ✓ Yes — if paid |
| HRA and other allowances | ✗ Not on their own — but if they exceed 50% of your total pay, the excess is added back to wages |
| Gross salary / CTC | ✗ No — don't plug these figures straight into the formula |
Add up the allowances that don't count as wages. If they are more than 50% of your total pay, the amount above 50% is added back to your wages for the gratuity calculation. So even if your basic pay is kept low and allowances make up most of your salary, your gratuity is worked out on at least half of your total pay.
Worked examples
Example 1 — IT professional, 8 years 4 months
Basic + DA: ₹60,000/month | Allowances: ₹50,000/month (under 50% of total pay of ₹1,10,000, so no add-back) | Service: 8 years 4 months → 8 years (final year not more than 6 months)
Gratuity = (₹60,000 ÷ 26) × 15 × 8 = ₹2,76,923
Example 2 — Senior manager, 12 years 7 months
Basic + DA: ₹1,20,000/month, allowances under 50% of total pay | Service: 12 years 7 months → 13 years (final year more than 6 months)
Gratuity = (₹1,20,000 ÷ 26) × 15 × 13 = ₹9,00,000
Example 3 — The 50% rule in action
Basic: ₹30,000/month, no DA | Allowances: ₹70,000/month | Total pay: ₹1,00,000 | Service: 6 years
Half of total pay is ₹50,000. Allowances are ₹20,000 above that, so ₹20,000 is added back → wages = ₹50,000.
Gratuity = (₹50,000 ÷ 26) × 15 × 6 = ₹1,73,077 (on basic pay alone it would have been ₹1,03,846)
Example 4 — High earner hitting the ceiling
Basic + DA: ₹2,00,000/month | Service: 20 years
Calculated = (₹2,00,000 ÷ 26) × 15 × 20 = ₹23,07,692 — but capped at ₹20,00,000
Example 5 — Fixed-term employee, 2 years 8 months
Basic + DA: ₹40,000/month | Contract service: 2 years 8 months → 3 years (final year more than 6 months)
Gratuity = (₹40,000 ÷ 26) × 15 × 3 = ₹69,231
A permanent employee with the same service would not yet qualify, because they have not completed 5 years. Check your contract dates carefully — they decide how much pro rata gratuity you receive.
The rounding rule
| Last year of service | What counts |
|---|---|
| 6 months or less | Ignored — round down |
| More than 6 months | Counts as a full year — round up |
Not sure how this applies to your situation?
Ask Legal Setu — free, no account needed.What is the maximum gratuity amount in India? The ₹20 lakh ceiling and tax treatment
Gratuity is capped at ₹20 lakh under the Code on Social Security, 2020. An employer can choose to pay more, but any amount above the ₹20 lakh tax-exempt limit is taxable.
The statutory ceiling
The maximum gratuity payable under the Code on Social Security, 2020 is ₹20,00,000. If your formula result is higher, the amount your employer is legally required to pay stops at ₹20 lakh.
Central government employees are covered by separate government rules with their own ceiling.
Important: the ceiling is on what the employer is legally required to pay. An employer can pay more voluntarily (as "ex-gratia") — some large companies do for senior employees. The amount above the ₹20 lakh tax-exempt limit is taxable in the employee's hands.
Is gratuity taxable in India? The ₹20 lakh lifetime exemption
Gratuity up to ₹20 lakh is tax-exempt, and that limit applies across your whole working life, not per employer. The exemption now sits in the Income-tax Act 2025, which replaced the 1961 Act from 1 April 2026 (it was formerly section 10(10)). Any amount above the limit is taxed as salary.
| Category of employee | Tax exemption | Taxable amount |
|---|---|---|
| Government employees (central/state) | Fully exempt | Nil |
| Private sector — covered employer | Exempt up to ₹20,00,000 (lifetime) | Amount above ₹20 lakh taxable as salary |
| Private sector — employer not covered | Worked out differently and can be lower, within the same ₹20 lakh lifetime limit | Check with a tax adviser |
The ₹20 lakh tax exemption is a lifetime aggregate limit — not ₹20 lakh per employer. It was formerly in section 10(10) of the Income-tax Act 1961; from 1 April 2026 it is in the Income-tax Act 2025. If you have received gratuity from more than one employer (for example ₹8 lakh from employer A and ₹14 lakh from employer B), the total tax-free amount across all of them is ₹20 lakh, and the excess is taxable. Keep records of gratuity received from each employer.
Can gratuity be forfeited in India?
Yes, but only in limited cases of serious misconduct — loss or damage to the employer's property caused by wilful omission or negligence, riotous or disorderly conduct or violence, or an offence involving moral turpitude — and only after a proper process. Poor performance is not a ground for forfeiture.
Forfeiture is the exception, not the rule. Your employer must be able to show that one of the recognised grounds applies to you.
Grounds for forfeiture
| Ground | What it covers | Extent of forfeiture |
|---|---|---|
| Loss or damage | Wilful omission or negligence causing loss, damage or destruction of the employer's property | Partial — up to the loss caused |
| Violence or disorder | Termination for riotous or disorderly conduct, or any act of violence | Whole or partial |
| Moral turpitude | Termination for an act that is an offence involving moral turpitude, committed in the course of employment | Whole or partial |
Forfeiture needs a proper process
Forfeiture should not be imposed on the spot. The employer has to establish the misconduct — typically through a proper disciplinary enquiry — before it relies on these grounds. If your gratuity was forfeited without a fair enquiry, or for something that doesn't fit the grounds above, get legal advice.
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 recover notice period salary, not gratuity)
- Minor disciplinary infractions — do not rise to the level of the forfeiture grounds
- Forfeiture for loss or damage cannot exceed the actual loss caused — it is not a blank cheque
Nomination — who receives gratuity if you die?
Your employer should ask you to file a nomination naming who will receive your gratuity if you die. If it hasn't, ask HR for the nomination form and file it — it saves your family delay later.
Tips for nomination
- Name each nominee clearly, with their relationship to you
- If you name more than one nominee, state each person's share (for example 50% to spouse, 50% to mother)
- Update your nomination after marriage, the birth of a child, or a death in the family
- Keep a copy of the nomination your employer acknowledges
If no nomination was made
If an employee dies without a nomination, gratuity is paid to the legal heirs. This usually takes longer, because the employer or the authority will need proof of who the heirs are.
How do I claim gratuity if my employer refuses to pay? Step by step
Apply to your employer in writing for payment of gratuity and keep a copy. If it refuses or doesn't pay, file a claim with the authority that handles gratuity claims at your district labour office. Claim forms and procedures now come from the Code on Social Security, 2020 and its rules, and they vary by state.
Step 1: Apply in writing
Send your employer a written application for payment of gratuity, stating your date of joining, last working day and last drawn wages. Your state's rules may prescribe a form — ask HR or the labour office. Keep a copy and proof of delivery.
Step 2: Ask for the calculation
Ask your employer to confirm in writing the amount it will pay and how it was worked out — the wages used, the years counted and any add-back under the 50% rule. If it says you are not eligible, ask for the reasons in writing.
Step 3: Chase payment
Your employer should pay promptly once gratuity becomes payable, and delay can make it liable to pay interest. If payment doesn't arrive, send a written reminder and then a legal notice.
Step 4: If employer disputes or refuses
If the employer rejects your claim or simply doesn't pay:
- File a claim with the authority that handles gratuity claims for your area — your district labour office can tell you which officer this is
- The authority will hear both sides and can order your employer to pay
- Either side can challenge the authority's order — a lawyer can advise on appeals and time limits
- Keep every letter, email and payslip — they are your evidence at each stage
Documents you need
- Your written application for gratuity, with proof you sent it
- Copy of offer letter / appointment letter showing date of joining
- Last drawn salary slip, showing basic pay, DA and each allowance
- Resignation acceptance letter or retirement order
- Relieving letter and/or experience certificate
- For fixed-term employees: your contract showing the start and end dates
- Bank account details for payment
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Your employer should pay gratuity promptly once it becomes payable, and delay can make it liable to pay interest. The exact time limit and interest come from the Code on Social Security, 2020 and its rules, so check with your district labour office if payment is late.
If your employer disputes how much is owed, ask it to pay the amount it accepts now and to give its reasons for the rest in writing. Keep that reply — it is useful evidence if you have to file a claim.
Possibly — check before you give up. For a permanent employee the basic rule is 5 years of continuous service, and the Code has its own rules on what counts as continuous service. How they apply to a final year of 10 months depends on the days you actually worked and the facts, so ask HR for your attendance record and get advice. If you were on a fixed-term contract, you qualify after just 1 year.
Many employers fund gratuity through a group gratuity insurance policy or a gratuity trust. Either way, your right to gratuity is against your employer. If the policy or fund falls short, the employer is still responsible for paying what you are owed.
You are still owed gratuity for your service. If the company goes into insolvency or liquidation, file your claim in that process as soon as it starts — how much is recovered, and when, depends on the process. Speak to a lawyer promptly.
Gratuity can only be reduced through lawful forfeiture on the grounds discussed above. Your employer should not take a notice period shortfall, loan recoveries or disciplinary fines out of your gratuity — those belong in other parts of your final settlement. If other parts of your final settlement are also pending, see our guide on how to recover unpaid salary and dues.
No — each employer pays gratuity separately for your service with it. Past gratuity doesn't reduce what your current employer owes you. It matters only for tax: the ₹20 lakh exemption is a lifetime limit across all employers (formerly section 10(10) of the 1961 Act, now in the Income-tax Act 2025). So if you received ₹12 lakh from employer A, only ₹8 lakh from employer B is tax-free.
Many Indian companies show a gratuity provision in the CTC, often around (basic ÷ 26) × 15 for one year's accrual. This is an accounting figure, not a payment — actual gratuity is paid when you leave after qualifying service (5 years, or 1 year on a fixed-term contract). The CTC figure doesn't reduce what you are legally owed, and your real gratuity is worked out on wages as the Code defines them.
Official sources
- India Code — official repository of Indian Bare Acts (Code on Social Security, 2020)