Key Takeaways
Gratuity is a statutory benefit, not a discretionary reward. If you meet the eligibility criteria, the Payment of Gratuity Act, 1972 legally binds the employer to pay it.
Employees become eligible after completing 5 years of continuous service with the same employer. Cases of death or permanent disability do not require this condition.
- As per current income tax rules, gratuity is tax-free up to ₹20 lakh for lifetime receipts. Any amount above this limit may attract tax depending on the employee category.
Employers must release gratuity within 30 days from the date it becomes payable. Delays can lead to interest penalties, making timely payment mandatory.
What is Gratuity?
As per the Payment of Gratuity Act, 1972, gratuity is a statutory monetary benefit payable by an employer to an employee on the termination of employment, provided the employee has rendered continuous service for a prescribed period.
This becomes payable due to:
Superannuation (retirement)
Resignation
Termination of employment
Death or permanent disablement (in such cases, the minimum service condition does not apply)
The company pays it as a one-time lump sum in recognition of an employee’s long and continuous service and calculates it in accordance with the formula prescribed under the Act.
Eligibility Criteria for Gratuity
An employee receives it under the Payment of Gratuity Act, 1972 if they meet certain conditions related to service duration, type of organisation, and reason for exit.
You qualify for it if:
You have completed at least five years of continuous service with the same employer. Continuous service includes uninterrupted employment and may also cover periods of approved leave, sickness, accident, maternity leave, or layoff as defined under the Act.
If an organisation that falls under the scope of the Act employs you. This includes factories, mines, shops, and establishments that employ 10 or more employees. Once an organisation is covered, it continues to remain covered even if its employee strength later drops below 10.
Your employment ends due to retirement, resignation, superannuation, or termination, provided the termination is not due to proven misconduct involving moral turpitude, riotous behaviour, or willful damage to employer property.
Important Exception
The 5-year service requirement is waived in cases of:
Employee death
Permanent disablement
In such cases, gratuity is paid to the nominee or legal heir.
Gratuity Calculation Formula
Further, Gratuity for salaried employees covered under the Act is calculated using this standard formula:
Gratuity = (Last drawn basic salary + DA) × 15 × completed years of service ÷ 26
Explanation:
15 represents wages for 15 days per year of service
26 is the number of working days in a month
Example of Calculation:
If your last drawn basic salary plus DA is ₹40,000 and you have completed 8 years of service:
Gratuity = ₹40,000 × 15 × 8 ÷ 26
Payable = ₹1,84,615
Gratuity Calculator
To simplify the calculation process, many online automated tools are available. These calculators typically require information such as the employee’s last drawn salary, the number of years of service, and any additional inputs as required by the specific calculator.
For instance, Zimyo’s gratuity calculator uses the standard statutory formula to accurately estimate the gratuity amount an employee is eligible to receive. The tool is free, easy to use, and helps both employers and employees get a quick and reliable estimate without manual calculations or confusion.
Taxation Rules for Gratuity
Tax applies, but the tax treatment varies based on whether the Payment of Gratuity Act covers the employer or not. For establishments covered by the act, the amount is exempt from tax up to a certain limit, which is currently set at ₹20 lakhs. Any amount exceeding this limit is taxable.
Further for establishments not covered by the act, the tax exemption limits itself to the least of the following three amounts:
- Actual Gratuity Received
- 15 days’ salary for each completed year of service
- ₹10 lakhs
It’s essential to consult with a tax advisor to understand the specific tax implications based on individual circumstances and prevailing tax laws.
Quick Overview on Gratuity Rules in India
Some key rules every employee should know:
Minimum 5 years of continuous service is required
Gratuity equals 15 days’ wages per completed year
Only basic salary and DA are considered for calculation
Employers must pay gratuity within 30 days of it becoming payable
Delayed payment attracts interest and penalties
Maximum tax-free gratuity limit is ₹20 lakh
Gratuity Forms Explained
This Act prescribes multiple forms, but two are used most frequently.
What Is Form F?
Form F is used to nominate one or more persons to receive gratuity in case of the employee’s death.
What Is Form I?
Further Form I is used by employees to apply for it after resignation, retirement, or superannuation.
Gratuity Form F PDF Download
Form F can be downloaded from the official Labour Ministry website. Many organisations also provide it through their internal HR systems or employee self-service portals. Your HR team can help you access the latest version if required.
For Other Payroll Related Doubts Check Out Our Payroll FAQs.
Difference Between Gratuity and Pension
Although both are post-retirement benefits, gratuity and pension serve different purposes.
| Feature | Gratuity | Pension |
|---|---|---|
| Payment Structure | One-time lump sum | Monthly recurring income |
| Who Pays | Employer | Employer or pension fund |
| Eligibility | Usually 5 years of service | Depends on scheme |
| Tax Treatment | Tax-free up to ₹20 lakh | Often partially taxable |
| Nomination | Through Form F | Part of pension enrollment |
Conclusion
Gratuity is a vital financial benefit that recognises long-term commitment and service. Knowing what it is, who is eligible, how it is calculated, and which forms are required empowers employees to claim their rightful dues without confusion.
Whether you are planning a job change, approaching retirement, or simply staying informed about your employee benefits, understanding it under the Payment of Gratuity Act, 1972 helps you make smarter financial decisions and protects your rights.
FAQs (Frequently Asked Questions)
Gratuity is the amount paid by the employer to their employee for serving more than 5 years with the company.
Employees who have completed a minimum of five years of continuous service with the same employer are eligible. However, this condition is waived in cases of death or disability.
As of the current regulations, the maximum tax-free limit is ₹20 lakhs. Any amount beyond this is taxable.
Generally, gratuity is not applicable if an employee resigns before completing five years of continuous service. However, there are exceptions such as death or disability.
Yes, an employee can approach the labor department or file a case in the labor court if the employer refuses to pay gratuity despite meeting the eligibility criteria.
Gratuity is calculated based on the employee’s basic salary and dearness allowance. Variable pay or bonuses are generally not considered in the calculation.
A PF account receives contribution from both employee and the employer whereas gratuity is paid by employer only.
