Introduction
Understanding the Employee Gratuity rules in India is essential for both employers and employees. Gratuity is a financial token of appreciation for years of service under the Payment of Gratuity Act 1972. This benefit not only provides financial security in old age but also offers tax exemption under specific limits. In this article, the key aspects of gratuity are simplified, covering the gratuity calculation formula and gratuity eligibility criteria.
While the rules may appear overwhelming at first, breaking them own into smaller sections makes them easier. Whether you are an HR professional ensuring compliance or an employee planning your future, being aware of these details is essential. The gratuity calculation formula considers three main factors: last drawn salary, years of service, and a fixed multiplier- giving you a clear method to compute your benefits. On the other hand, the gratuity eligibility criteria legally define who qualifies for this benefit. Read this article: Payroll Compliance Guide for Indian Businesses: Best Practices and Legal Insights
Here are some important points to keep in mind:
- Employee gratuity rules in India: Complete rules and statutory requirements of employee gratuity in India.
- Gratuity calculation formula: (Last drawn salary × 15 × Years of service ÷ 26) explanation of how to calculate gratuity.
- Gratuity eligibility criteria: Eligibility requirements for gratuity (for instance, minimum 5 years of service).
- Payment Gratuity Act, 1972: The law governing gratuity payments.
- Gratuity tax exemption limit: Gratuity tax exemption limits as per existing laws.
By keeping these points in mind, this article will help you deal with the gratuity process efficiently and ensure that you get all the entitled benefits in a timely and legally compliant manner.
What Is Gratuity?
Gratuity is a reward paid by employers to their employees for long-term service. It serves as a financial cushion for the employees’ post-retirement, resignation, or any unexpected circumstances. This benefit is regulated and enshrined in India by the employee gratuity rules under the Payment of Gratuity Act 1972.
- What is Gratuity?
- A one-time payment as an appreciation of the employee’s commitment and service.
- It serves as a security blanket for retirement or emergencies.
- Purpose:
- To provide economic stability after employment ends.
- Reward employees for long-term loyalty and commitment.
Legal Framework: Payment of Gratuity Act 1972
- Legislation overview:
- Under the Payment of Gratuity Act 1972, gratuity must be paid to the eligible employees in the organization.
- Specific amendments under the new gratuity rules under the labour code have been put in place that are aimed at modernizing the framework.
- Key benefits:
- Ensure best practices for employers and employees.
- Maintains compliance with the employee gratuity rules in India.
Key Components of Gratuity
| Component | Description |
| Eligibility Period | Minimum 5 years of continuous service required. |
| Calculation Basis | Based on last drawn salary and years of service. |
| Tax Implications | Tax-free up to ₹20 lakhs as per existing laws. |
| Payment Timeline | Must be paid Within 30 days of eligibility. |
Employees Covered & Gratuity vs. Provident Fund
- Who is covered:
- Organizations with 10 or more employees.
- Permanent employees and, in some cases, contractors and seasonal employees.
- Gratuity vs. Provident Fund:
- Gratuity: A one-time lump sum amount, paid at the end of service.
- Provident Fund (PF): A regular contribution-based savings scheme.
Importance of Gratuity
Gratuity serves several key purposes:
- Financial security: Serve as a safety net for employees post-retirement or post-job change.
- Incentives for loyalty: Provides an incentive for long-term commitment towards the organization.
- Statutory compliance Ensures employers meet legal obligations.
- Employee welfare: Contributes to the overall wellness of the employees.
Gratuity vs. Other Employee Benefits
- Provident Fund: Employees contribute regularly, and the amount accumulates over time.
- Pension: Regular payments made after retirement.
- Gratuity: A lump sum paid based on years of service.
Advantages of Gratuity
Financial Security Through Gratuity
Gratuity is an important financial safety net for employees. The employee gratuity rules in India provide a huge scope for a lump sum payout at the time of retirement or resignation, offering financial stability.
How does gratuity enhance financial security?
- Offers a large lump sum to cover t short-term expenses after retirement.
- Helps pay off debts and acts as a financial cushion when you switch jobs.
- Offers peace of mind and supports long-term financial planning.
Advantages of Employer-Employee Relationship
A strong benefits plan builds trust and loyalty. This is crucial to fostering a healthy workplace culture.
How can gratuity help with employee retention?
- Demonstrates employer care, strengthening bonds between employees and management.
- Provides an extra layer of job security that promotes employee retention.
- This leads to increased morale and job satisfaction, ultimately improving the company’s image.
Tax Benefits of Gratuity
One of the biggest advantages of gratuity is its tax-friendly nature, particularly under the Gratuity Tax Exemption Limit.
What Are the Tax Benefits of Gratuity?
| Gratuity Amount | Tax Implication |
| Up to ₹20 lakhs | Fully tax-exempt |
| Above ₹20 lakhs | Taxable |
Gratuity as an Inflation Hedge
Gratuity is calculated on the gratuity calculation formula, which gets automatically adjusted with salary hikes.
- Ensures long-term financial stability by growing with salary increments.
- Acts as a buffer against rising living costs, securing future financial needs.
Statutory Minimum & Complementary Benefits
Gratuity is a legal right under the Payment of Gratuity Act 1972, ensuring employees receive their due benefits.
How can legal mandates support financial security?
- The employee gratuity rules in India ensure eligibility and standardization of certain benefits.
- Provides a diversified income source, complementing other retirement safety net (e.g., provident fund and pension).
- The eligibility criteria ensure long-time employees receive rightful benefits.
Incorporating these aspects into your benefits package aids in both financial security and upholds trust and commitment to statutory obligations and fostering employee trust.
Who Is Eligible for Gratuity in India?
The employee gratuity Rules in India help define the eligibility for receiving this financial benefit. Here’s a closer look at the eligibility requirements and important exceptions.
Eligibility Criteria for Basic Gratuity
- Service requirement:
- Minimum 5 years of continuous service (except in case of death or disability).
- Applies upon retirement, resignation, or termination under normal circumstances.
- Core focus:
- These rules serve as the foundation for the gratuity accepted guideline in India.
What are the gratuity regulations for private companies?
- Private sector guidelines:
- Most private companies follow the 5-year rule for gratuity eligibility.
- However, some organizations may provide benefits much earlier, depending on their policy.
Gratuity Rules for Employees Leaving Before 5 Years
- Exceptions:
- In case of death or permanent disability, gratuity is payable even before completing 5 years.
- Additional points:
- Employers may choose to pay a pro-rata gratuity for employees leaving before 5 years, but it is not legally required under the Payment of Gratuity Act.
Minimum Number of Employees
For an organization to be covered under the Payment of Gratuity Act, it must meet the following criteria:
| Sector | Minimum Number of Employees |
| Factories, mines, oilfields, plantations, ports | 10 or more |
| Shops and establishments | 10 or more (in some states) |
Types of Employees Eligible
Gratuity benefits apply to the following categories of employees, including:
- Permanent employees
- Temporary employees
- Part-timers (working for fixed hours)
- Seasonal employees
- Piece-rate workers
However, the apprentices and contract employees are not entitled to gratuity unless mentioned in the terms of the contract.
Reasons for Termination of Employment
Gratuity is payable in the following situations:
- Superannuation (retirement)
- Resignation (if 5 years of continuous service is completed)
- Death
- Disability because of an accident or disease
Resignation is one such reason for which gratuity payment can be claimed, but unless mentioned otherwise by the employer, the condition of 5 years of continuous service should be fulfilled for claiming gratuity.
Special considerations
- Transfer of employees: If an employee transfers between branches or departments of the same organization, their service period r will be counted as continuous for calculating gratuity.
- Mergers and acquisitions: In the case of mergers or acquisitions, the new employer usually takes over the gratuity liabilities of the previous company.
- Seasonal establishments: For employees of seasonal establishments, the condition of continuity of service for 5 years shall be deemed to have been fulfilled if the employee has worked for at least 75% of the number of days on which the establishment had worked during such period.
Both employers and employees must be aware of these requirements to ensure compliance with gratuity laws and to plan for future financial security.
Gratuity Rules in India
In India, both employers as well as employees must be aware of the gratuity rules. The Payment of Gratuity Act, of 1972, governs how gratuity must be compensated for employment lasting over 5 years. Here are some important details regarding gratuity rules:
Eligibility Criteria
As per the eligibility criteria for gratuity, an employee should:
- Minimum services of 5 years continuous.
- Work a minimum of 240 days.
- Be employed in organizations with 10 or more employees.
Maximum Gratuity Amount
However, the gratuity amount has a maximum limit:
| Year | Maximum Gratuity Limit |
| Pre-2010 | ₹3,50,000 |
| 2010-2018 | ₹10,00,000 |
| Post-2018 | ₹20,00,000 |
Payment Timeline
Employers must follow timelines for gratuity payment:
- Payment must be made within 30 days of the employee’s last day of work.
- If delayed, interest at 10% p.a. is applicable on the pending amount.
Forfeiture of Gratuity
Employers have the right to forfeit gratuity in the following cases:
- Termination due to misconduct.
- Damage to employer property due to wilful default or negligence.
- Breaching the employment contract.
Gratuity for Part-Time Employees
Part-time employees can also be eligible for gratuity if they fulfill these conditions:
- Continuous service of 5 years.
- Minimum 240 days working days per year.
- Salary drawn is used as a base for gratuity calculation.
Gratuity Nomination
Employees must declare a nominee of gratuity:
- Nomination must be submitted to the employer.
- Can be updated anytime during employment.
Gratuity to Contract Employees
Gratuity is applicable for contract employees under the following circumstances:
- Completing 5 years of uninterrupted service.
- Have had their contract renewed multiple times.
- Have worked at least 240 days a year.
Gratuity in Mergers & Acquisitions
- In case of mergers or acquisitions, gratuity obligations are transferred to the new entity: Liability for gratuities transfers to the new entity.
- Employees’ past service is counted as continuous.
Having discussed the basic rules of gratuity, we will now take a closer look at what the gratuity application form is and why it is so important in the process.
Gratuity Application Form: Process and Requirements
The gratuity application form is an essential document for employees seeking to claim their gratuity benefits. Most organizations have these standardized applications available through HR or the company intranet portal for gratuity itself. If it is not easily accessible, employees may directly contact their HR representative for the form.
How to apply for gratuity as per employee gratuity rules in India
- Compliance: The application process follows the Payment of Gratuity Act, of 1972.
- Statutory requirement: All businesses covered under the act must provide this form.
- Accessibility: Forms are usually readily available through the HR department or internal systems.
What are the Elements of a Gratuity Application Form
A standard application form for gratuity consists of different sections:
1. Personal information
- Full name
- Employee ID
- Date of birth
- Contact details (address, telephone, email)
2. Employment details
- Date of joining
- Last working day (if relevant)
- Department
- Designation
- Reason for leaving (retired, resigned, etc.)
3. Gratuity claim details
- Last drawn salary: Necessary for applying the gratuity calculation formula.
- Total years of service: Determines eligibility.
- Previous gratuity claims: If any.
4. Bank account information
- Bank name
- Account number
- IFSC code
- Branch name and address
5. Declaration and signature
A statement that all information provided in these applications is accurate, followed by signing and date of submission.
How to Fill and Submit Gratuity Application Form
Filling Out the Form
- Ensure clear handwriting and/or typed entries if submitting electronically.
- Verify all details for accuracy.
- Attach applicable supporting documents (salary slips, service certificates, etc.).
- Keep a copy of the filled-out form for reference.
- Check if they match the gratuity eligibility terms.
Submitting the Form
Submission methods vary depending on your company’s policies:
| Submission Method | Description | Advantages |
| In-person | Hand-deliver to HR | Immediate confirmation of receipt |
| Send a scanned copy to the HR email | Quick and convenient | |
| Online Portal | Upload via the company’s internal system | Trackable and paperless |
| Postal Mail | Send to the company address | Useful for ex-employees |
Processing Time and Follow-up
- Processing usually takes 30 to 60 days.
- Follow up with HR if no response is received within a reasonable period.
- Submitting and documenting it properly ensures timely approval and compliance with the gratuity tax exemption limit.
By complying with the Payment of Gratuity Act 1972 and other relevant employee gratuity rules in India, the application process remains smooth and legally compliant.
How Is Gratuity Calculated? Formula & Examples
The gratuity calculation formula aims to be fair and consistent. It takes into consideration the employee’s final drawn salary and the number of years of service to arrive at the final payout. Below is a step-by-step guide on gratuity calculation in India.
Typical gratuity calculation formula
- Formula:
Gratuity = (Last drawn salary × 15 × Number of years of service) ÷ 26 - Key components
- Last drawn salary: Includes basic pay and dearness allowance (DA).
- Years of service: Only completed years are considered (fractions are ignored).
- Multiplier (15/26): Represents the basis of statutory computation.
How is gratuity calculated in India?
- Step-by-step process:
- Determine final salary: Sum of basic pay and dearness allowance.
- Count completed years: Example: 7.8 years is considered 7 years.
- Example calculation:
- If the last drawn salary of an employee is ₹30,000 and they have completed 10 years of service:
- Gratuity = (30,000 × 15 × 10) ÷ 26 ≈ ₹1,73,077
Special Cases and Variations
- Seasonal/Contract employee
- This could be subject to various company-specific policies that differ from the above.
- Government vs. Private Sector:
- Government employees may have different formulas and higher gratuity limits.
- Private employees follow the gratuity act formula.
Table example:
| Parameter | Example Value |
| Last Drawn Salary | ₹30,000 |
| Completed Years of Service | 10 years |
| Calculation (30,000×15×10) | 4,500,000 |
| Division Factor | 26 |
| Approx. Gratuity Amount | ₹1,73,077 |
Additional Considerations
- Tax implications:
- The final amount received may be affected by the gratuity tax exemption limit.
- Legal compliance:
- Following the employee gratuity rules in India will help to ensure that payouts are made without disputes.
Different Methods for Calculating Gratuity
1. For employees covered by the Payment of Gratuity Act:
- Maximum limit: ₹20 lakhs.
2. Eligibility:
- Minimum 5 years of continuous service
- Alternative formula: (1/4 x Last Drawn Salary x Number of Years of Service).
- No maximum limit on the gratuity amount.
3. For employees not covered by the act:
- Formula: As per company policy/employment contract-based calculation.
- Maximum limit: Normally the 15-day template, but needs to stay flexible.
| Employee Type | Formula | Maximum Limit |
| Covered under Act | (15 x Salary x Years) / 26 | ₹20 lakhs |
| Government | (1/4 x Salary x Years) | No limit |
| Not covered | As per company policy | As per policy |
Pro tips for accurate gratuity calculation
- Use updated salary figures.
- Ensure salary calculation includes all applicable components as per the act.
- Verify years of service are being counted (considering rounding rules).
- Check company-specific policies that could impact the calculation.
- For quick and accurate results, use a trusted gratuity calculator.
What are the Taxation Rules for Gratuity?
Taxation Rules for Gratuity
Both employers and employees must understand the taxation rules for gratuity. The tax treatment depends on various factors, including the employment status and the gratuity amount received. Below is a detailed breakdown of gratuity tax rules in India.
Gratuity tax exemption limits
The Income Tax Act, of 1961 provides exemptions on gratuity payments based on employee category:
| Employee Category | Tax Exemption Limit |
| Government Employees | Fully exempt from tax |
| Non-Government Employees (Registered under the Gratuity Act) | Least of the following: – ₹20 lakhs – 15 days’ salary for each completed year of service – Actual gratuity received |
| Non-Government Employees (not covered under Gratuity Act) | Least of the following: – ₹20 lakhs – Half month’s salary for each completed year of service – Actual gratuity received |
Taxable Gratuity Calculation
Here are the steps to calculate taxable gratuity:
- Calculate the total amount of gratuity received.
- Determine the exempt amount based on the applicable exemption rules.
- Taxable gratuity = Total Gratuity – Exempted Amount.
- The remaining amount is Taxable under the head Income from Salary.
Tax Rates on Taxable Gratuity
The taxable portion of gratuity is added to the total income of an employee and taxed as per the relevant income tax slab rates. A general overview of the tax slabs is as follows:
| Annual Income | Tax Rates |
| Up to ₹2.5 lakhs | No Tax |
| ₹2.5 lakhs – ₹5 lakhs | 5% |
| ₹5 lakhs – ₹10 lakhs | 20% |
| Above ₹10 lakhs | 30% |
Note that the rates can differ with annual budget announcements, hence it is best to refer to the latest tax slabs.
TDS on Gratuity
The taxable portion of gratuity must be deducted by employers as tax deducted at source (TDS) before paying the gratuity to the employee. TDS rate varies according to the tax bracket of the employee.
Tax Relief Under Section 89(1) – Reduced Tax Burden
Where this result of higher tax outgo in case of the one-time receipt of gratuity receiving gratuity in a lump sum causes a higher tax outgo, employees can claim relief under section 89(1) of the Income Tax Act. This provision helps manage the tax burden by allowing taxpayers to have the income spread out over multiple years for calculation purposes.
Gratuity received by Family Members
Gratuity received by the family of the employee in the event of the death of the employee is tax-exempt under section 10(10)(i) of the Income Tax Act. Tax laws change periodically, so employees receiving gratuities should consult tax professionals for accurate tax planning and optimization.
Step-by-step process of claiming gratuity
Specific gratuity eligibility criteria need to be fulfilled to be eligible to claim this benefit. Key steps include:
- Claim process:
- Submit a gratuity claim form (Form I) along with the required supporting documents. Employer verifies service records to confirm eligibility.
- Employer processes payment within 30 days (as per the Payment of Gratuity Act, 1972).
- Follow-up:
- Response time: Employers must respond within 30 days of receiving the gratuity claim.
- What if the employer refuses?
The employee can approach the controlling authority under the Payment of Gratuity Act. If unresolved, the employee can file a complaint with the labour court.
Gratuity Amount Investment Options
Safe Investment Options
Whether you are receiving your gratuity amount, it is important to invest it well for your financial stability. Here are a few alternatives for safe investments:
- Fixed Deposits (FDs):
- Offer guaranteed returns
- Low-risk investment
- Various tenures available
- Public Provident fund (PPF):
- Government-supported savings program
- Tax-free returns
- Option for long-term (15 years) investment
- Senior Citizen Savings Scheme (SCSS)
- Ideal for retirees
- Interest rates higher than that of fixed deposits
- Quarterly interest payouts
- National Savings Certificate (NSC):
- Investing in a fixed-income option government-backed security
- Section 80C tax benefits
Investment Choices Aimed at Growth
If you’re interested in growing your wealth over the long term, try:
- Mutual Funds:
- Professional management
- Diversified portfolio
- Stocks:
- Potential for high returns requires market knowledge
- More risky than other options
- Real Estate:
- Tangible asset aAbility to earn rent as well as increase your capital
- Long-term investment horizon
Comparison of Investment Options
| Investment Option | Risk Level | Potential Returns | Liquidity |
| Fixed Deposits | Low | Moderate | High |
| PPF | Low | Moderate | Low |
| SCSS | Low | Moderate | Moderate |
| NSC | Low | Moderate | Low |
| Mutual Funds | Moderate | High | High |
| Stocks | High | Very High | High |
| Real Estate | Moderate | High | Low |
Frequently Asked Questions
1. Can an employee receive gratuity if they resign?
Yes, an employee becomes eligible for gratuity upon resignation, if they have completed at least 5 years of continuous service with the employer.
2. How is gratuity computed for part-time employees?
The same formula applies to part-time employees in calculating their gratuity. But its calculation uses the last drawn salary but that is prorated based on the number of hours worked.
3. Which companies in India are required to pay gratuity?
All companies with 10 or more employees are legally required to provide gratuity. Smaller companies might decide that giving a tip as an employee benefit will help them attract and retain talent.
4. Can an employer legally deny gratuity?
No, An employer cannot deny gratuity to an employee who meets the eligibility criteria. However, gratuity can be forfeited in case of misconduct by the employee leading to financial loss to the organization.
5. How Much is the limit for claiming Gratuity?
The employees shall make an application for gratuity within 30 days after it becomes due. Delays may be accepted if there is a valid reason.
6. Is gratuity paid for service under 5 years?
Generally, no However, in the event of death (and disablement), gratuity is payable even if the employee has completed less than 5 years of service.
Conclusion
Both employers and employees must understand the employee gratuity rules in India to ensure compliance with the Payment of Gratuity Act, 1972. Proper knowledge of gratuity eligibility, calculation formulas, and tax exemptions helps employees maximize their benefits while ensuring a smooth transition in their careers. A well-regulated gratuity system strengthens the employer-employee relationship and provides financial security. Staying updated with legal changes and seeking professional advice can help optimize gratuity benefits.
About Us
Corrida Legal is a boutique corporate & employment law firm serving as a strategic partner to businesses by helping them navigate transactions, fundraising-investor readiness, operational contracts, workforce management, data privacy, and disputes. The firm provides specialized and end-to-end corporate & employment law solutions, thereby eliminating the need for multiple law firm engagements. We are actively working on transactional drafting & advisory, operational & employment-related contracts, POSH, HR & data privacy-related compliances and audits, India-entry strategy & incorporation, statutory and labour law-related licenses, and registrations, and we defend our clients before all Indian courts to ensure seamless operations.
We keep our clients future-ready by ensuring compliance with the upcoming Indian Labour codes on Wages, Industrial Relations, Social Security, Occupational Safety, Health, and Working Conditions – and the Digital Personal Data Protection Act, of 2023. With offices across India including Gurgaon, Mumbai, and Delhi coupled with global partnerships with international law firms in Dubai, Singapore, the United Kingdom, and the USA, we are the preferred law firm for India entry and international business setups. Reach out to us on LinkedIn or contact us at contact@corridalegal.com/+91-8826680614 in case you require any legal assistance. Visit our publications page for detailed articles on contemporary legal issues and updates.