Gratuity in India — How to Apply, Eligibility & Benefits

What Is Gratuity?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for their service. It is a statutory benefit governed by the Payment of Gratuity Act, 1972, applicable to all establishments employing 10 or more persons.

Think of it as a retirement/exit reward — you earn it through years of loyal service, and it's paid when you leave the organisation.

Key Point: Gratuity is paid by the employer. There is no deduction from your salary for gratuity — it is entirely the employer's liability.

Who Is Eligible for Gratuity?

You are eligible for gratuity if you meet these conditions:

1. Minimum 5 years of continuous service with the same employer
2. You work in an establishment covered under the Payment of Gratuity Act (any factory, mine, oilfield, plantation, port, railway, or shop/establishment with 10+ employees)

When Is Gratuity Payable?

Gratuity becomes payable on:

• Superannuation (reaching retirement age)
• Retirement or resignation (after 5 years of service)
• Death or disablement (5-year requirement is waived)

Important Exceptions

• Death or disability: The 5-year rule does not apply. Gratuity is payable even if the employee served for less than 5 years.
• Contract employees: If you have worked on continuous contracts with the same employer for 5+ years, you may be eligible. Courts have upheld this in several judgments.
• Fixed-term employees: Under the 2018 amendment, fixed-term employees are eligible for gratuity proportionate to their service period, even if less than 5 years.

Gratuity Calculation Formula

For Employees Covered Under the Gratuity Act

Formula:

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

Where:

• Last Drawn Salary = Basic Salary + Dearness Allowance (DA)
• 15 = 15 days' wages for each year of service
• 26 = Working days in a month (excluding 4 Sundays)
• Years of Service = Completed years (service of 6 months or more in the last year is rounded up)

Example Calculation

Scenario: Rahul worked for 12 years. His last drawn salary (Basic + DA) is ₹50,000.

Gratuity = (15 × ₹50,000 × 12) ÷ 26 Gratuity = ₹90,00,000 ÷ 26 Gratuity = ₹3,46,154

For Employees NOT Covered Under the Act

For employees in establishments not covered by the Act (but where the employer pays gratuity voluntarily):

Gratuity = (15 × Last Drawn Salary × Years of Service) ÷ 30

Note: Here 30 days is used instead of 26.

Maximum Gratuity Limit

The maximum gratuity payable under the Act is ₹20,00,000 (₹20 lakh). Any amount above this is at the employer's discretion and treated differently for tax purposes.

Gratuity Tax Exemption Rules

Gratuity received has specific tax treatment under the Income Tax Act:

Government Employees

Gratuity received by Central/State government employees and local authority employees is fully exempt from income tax under Section 10(10)(i). No upper limit applies.

Private Sector Employees (Covered Under the Act)

The least of the following three amounts is exempt from tax:

1. Actual gratuity received
2. ₹20,00,000 (₹20 lakh)
3. 15 days' salary for each completed year of service (calculated as per the formula above)

Private Sector Employees (NOT Covered Under the Act)

The least of the following is exempt:

1. Actual gratuity received
2. ₹20,00,000 (₹20 lakh)
3. Half month's salary for each completed year of service

Note: The ₹20 lakh limit was enhanced from ₹10 lakh effective 29 March 2018 via government notification. Also see our guide on Income Tax Saving Tips & 80C Investments for more ways to reduce your tax liability.

How to Claim Gratuity — Step-by-Step

Step 1: Check Your Eligibility

Ensure you have completed 5 years of continuous service (or qualify under an exception like death/disability).

Step 2: Submit Application (Form I)

• Fill Form I (application for gratuity by an employee) and submit it to your employer.
• In case of death, the nominee or legal heir submits Form J.
• The form should be submitted within 30 days of it becoming payable, though delays can be condoned.

Step 3: Employer Processes Payment

• The employer must determine the gratuity amount and pay within 30 days from the date it becomes payable.
• The employer issues a notice in Form L specifying the amount.
• If the employer rejects or reduces the claim, they must issue Form M with reasons.

Step 4: Payment

• Gratuity is paid via cheque, demand draft, or bank transfer.
• If the employer delays payment beyond 30 days, simple interest is payable on the gratuity amount.

Step 5: Dispute Resolution

If your employer refuses or underpays gratuity:

1. File a complaint with the Controlling Authority (Labour Commissioner) in your area
2. The authority will hear both parties and pass an order
3. Appeals can be made to the Appellate Authority within 60 days

Gratuity Nomination Form (Form F)

Every employee eligible for gratuity must file a nomination with their employer:

• Form F is used for nominating a person to receive gratuity in case of the employee's death
• You can nominate family members only (if you have a family)
• If you have no family, you can nominate anyone — but it becomes void once you acquire a family
• Nominations can be modified or changed anytime by filing a fresh Form F
• The employer must keep the nomination on record

Tip: Always keep your nomination updated, especially after marriage or birth of a child.

Gratuity for Private & Contract Employees

Private Sector Employees

All private companies with 10 or more employees are covered under the Payment of Gratuity Act. This includes:

• IT companies, startups, MNCs
• Retail chains, banks, hospitals
• Manufacturing units, factories

Once an establishment is covered (crosses 10 employees), it remains covered even if the employee count drops below 10 later.

Contract / Outsourced Employees

• If you work through a contractor but at the same establishment for 5+ years, you may claim gratuity from the principal employer or the contractor.
• The Supreme Court has held that contract workers who have worked continuously are entitled to gratuity.
• Maintain records of your joining date, salary slips, and attendance.

Seasonal Employees

For employees in seasonal establishments, 7 days of wages per season is payable instead of 15 days per year.

Payment of Gratuity Act, 1972 — Key Provisions

When Can Gratuity Be Forfeited?

An employer can forfeit gratuity (wholly or partly) only if the employee's services were terminated for:

1. Riotous or disorderly conduct or any act of violence
2. Any offence involving moral turpitude committed during employment

Important: Mere poor performance or misconduct that doesn't amount to the above cannot be grounds for forfeiture.

Important Tips

1. Keep salary slips and appointment letters — these prove your service period and last drawn salary for gratuity calculation
2. File Form F (nomination) as soon as you join — update it after life events like marriage
3. Gratuity is separate from PF and pension — you're entitled to all three. See our EPF vs NPS Retirement Guide to plan your retirement corpus
4. Don't confuse "5 years" strictly — service of 4 years and 240 days has been held as qualifying in several High Court rulings
5. Consider NPS alongside gratuity for long-term retirement planning — read our NPS Account Guide

Frequently Asked Questions (FAQs)

Q1: Is gratuity applicable to employees in companies with less than 10 employees?

The Payment of Gratuity Act mandates coverage for establishments with 10 or more employees. However, some employers voluntarily provide gratuity even with fewer employees. If not covered by the Act, you cannot legally enforce it.

Q2: Can I receive gratuity if I resign before 5 years?

No. You must complete a minimum of 5 years of continuous service to be eligible. The only exceptions are death or disability, where the 5-year requirement is waived.

Q3: Is gratuity taxable?

Gratuity is partially exempt from income tax. For private employees, the exempt amount is the least of: actual gratuity, ₹20 lakh, or the formula-based amount. Government employees enjoy full tax exemption.

Q4: What if my employer refuses to pay gratuity?

File a complaint with the Controlling Authority (usually the Labour Commissioner or Assistant Labour Commissioner) in your jurisdiction. They have the power to direct the employer to pay.

Q5: Is the ₹20 lakh gratuity limit per employer or lifetime?

The ₹20 lakh tax exemption limit is a cumulative lifetime limit across all employers. If you received ₹15 lakh from one employer, only ₹5 lakh from the next employer would be tax-exempt.

Q6: How is "last drawn salary" calculated for gratuity?

Last drawn salary means Basic Pay + Dearness Allowance (DA) at the time of leaving. HRA, bonuses, overtime, and other allowances are not included.

Q7: Can gratuity be paid as part of CTC?

Many companies include gratuity in CTC (Cost to Company). This is for accounting purposes only. The actual gratuity is payable only when you become eligible (5 years of service) and leave the organisation.

Q8: What happens to gratuity if an employee dies?

Gratuity is paid to the nominee (as per Form F). If there is no nomination, it is paid to the legal heirs. The 5-year service requirement is waived in case of death.

Related Guides

• EPF vs NPS — Which Is Better for Retirement?
• Income Tax Saving Tips & Section 80C Investments
• NPS — National Pension System Account Guide

This guide is for informational purposes only and is not affiliated with any government body. Information is based on the Payment of Gratuity Act, 1972 and amendments. Rules may change — always verify with your employer or the nearest Labour Commissioner office for the latest provisions.