How Is Gratuity Calculated and Who Is Eligible Under Indian Law?

Gratuity is a statutory employment benefit generally payable when qualifying service ends. This guide explains who qualifies, how to calculate the amount, when the five-year rule does not apply, and how to recover unpaid gratuity.

Updated: 14 November 2026 | Indian employment law

Legal framework: The Payment of Gratuity Act, 1972 provides the familiar gratuity rules discussed below. The Code on Social Security, 2020 contains successor gratuity provisions, including special treatment for fixed-term employees. The applicable provision depends on the commencement notifications, transition rules and the employee's circumstances. Verify the operative law and current notifications for the relevant date before relying on a claim.

What Is Gratuity Under Indian Law?

Gratuity is a lump-sum benefit payable by an employer in recognition of qualifying service. Under section 1(3) of the Payment of Gratuity Act, 1972, the Act applies to factories, mines, oilfields, plantations, ports, railway companies and specified shops or establishments employing ten or more persons, subject to the statutory conditions. Once covered, an establishment generally remains covered even if its workforce later falls below ten.

Relevant statutory definitions

Employee (section 2(e)): A person, other than an apprentice, employed for wages in an establishment to which the Act applies, excluding persons holding certain government posts governed by other gratuity rules.

Wages (section 2(s)): Emoluments earned on duty or leave according to employment terms and paid or payable in cash, including dearness allowance, but excluding bonus, commission, house rent allowance, overtime wages and other allowances for the 1972 Act calculation.

Continuous service (section 2A): Service uninterrupted or treated as continuous under the statutory rules, including specified interruptions and deemed continuous service based on days actually worked.

Who Is Eligible for Gratuity?

Section 4 of the 1972 Act generally provides gratuity on termination of employment after at least five years of continuous service due to superannuation, retirement, resignation, death or disablement from accident or disease.

  • Death or disablement: The five-year minimum is not required.
  • Resignation: An employee who meets the qualifying service conditions may claim gratuity; it is not limited to retirement.
  • Deemed continuous service: Section 2A contains thresholds generally of 240 days (or 190 days for specified establishments or employees) in a 12-month period, subject to its precise conditions.
  • Four years and 240 days: Some judicial decisions have treated particular service histories as qualifying. This is not a universal statutory shortcut to five years; outcomes depend on jurisdiction and facts.
  • Fixed-term employment: Special provisions under the Code on Social Security, 2020 may affect eligibility, subject to the operative legal regime.

How Is Gratuity Calculated?

For a monthly-rated employee under section 4(2) of the 1972 Act, the standard formula is:

Gratuity = (Last drawn monthly basic pay + dearness allowance) x 15 x completed years of service / 26

A service period exceeding six months is counted as a further completed year for this formula. For example, 7 years and 8 months is ordinarily counted as 8 years, while 7 years and 5 months is counted as 7 years. The statutory rules for seasonal establishments and piece-rated employees differ.

Example 1: Seven years and eight months

If last drawn basic pay plus dearness allowance is Rs. 52,000 per month and qualifying service is 7 years and 8 months, counted service is 8 years. Gratuity = 52,000 x 15 x 8 / 26 = Rs. 2,40,000.

Example 2: Ten completed years

If the qualifying last drawn monthly wages are Rs. 65,000 and service is 10 completed years, gratuity = 65,000 x 15 x 10 / 26 = Rs. 3,75,000.

Gratuity calculator

Estimated gratuity: Rs. 2,40,000Illustrative estimate under the standard 1972 Act formula; not a determination of legal entitlement or tax exemption.

What Are the Gratuity Ceiling and Special Rules?

Under the 1972 Act framework, the notified statutory gratuity ceiling was increased to Rs. 20 lakh with effect from 29 March 2018. The ceiling and any later amendments or applicable notifications should be verified for the date of entitlement. An employer may provide more favourable gratuity under an award, agreement or contract.

For employees in seasonal establishments not employed throughout the year, the Act generally prescribes gratuity at seven days' wages for each season. For piece-rated employees, wages are calculated using the statutory average, excluding overtime. For death, gratuity is payable to the nominee or heirs in accordance with the law.

Tax treatment: Exemption is governed separately by income-tax law and varies according to employment category and statutory limits. Gratuity payable and gratuity exempt from tax are not necessarily the same amount.

When Must Gratuity Be Paid and How Can It Be Recovered?

Under section 7 of the 1972 Act, an employer must determine gratuity and arrange payment within 30 days from the date it becomes payable. Delayed payment ordinarily attracts statutory interest, subject to the specified exception. The employee, nominee or legal heir may apply in the prescribed manner.

  1. Gather appointment and relieving letters, payslips, proof of service and the employer's gratuity calculation.
  2. Submit a written claim to the employer, setting out the service period, last drawn qualifying wages and amount claimed.
  3. If payment is refused, disputed or delayed, approach the competent controlling authority under the applicable gratuity law and rules.
  4. Where an order is passed and remains unpaid, pursue the statutory recovery mechanism. Appeals and limitation periods must be checked carefully.

Can an employer forfeit gratuity?

Section 4(6) of the 1972 Act permits forfeiture only in defined circumstances: to the extent of loss or damage caused by wilful act, omission or negligence; or wholly or partly for specified riotous, disorderly or violent conduct, or an offence involving moral turpitude committed in the course of employment, subject to statutory requirements. A mere resignation or ordinary disciplinary allegation does not automatically justify forfeiture.

Frequently Asked Questions

Is gratuity payable after four years?

Ordinarily, the 1972 Act requires five years of continuous service, except for death or disablement. Whether particular periods amount to deemed continuous service depends on section 2A and relevant case law.

Is HRA included in gratuity wages?

No. Under the 1972 Act definition of wages, house rent allowance is excluded; basic pay and dearness allowance are normally used in the monthly-rated formula.

Can gratuity be claimed after resignation?

Yes, subject to qualifying service and other applicable conditions.

Does the gratuity ceiling mean every employee receives Rs. 20 lakh?

No. It is a statutory limit under the cited framework, not a fixed payment. Actual entitlement depends on qualifying wages, service and applicable rules.

Conclusion

Gratuity is an important statutory protection for employees. Accurate calculation requires examining the applicable law, continuous service, last drawn qualifying wages, statutory rounding and any contractual enhancement. Where an employer fails to pay, the statutory claims and recovery process may provide a remedy.

This article is general legal information and does not replace advice based on employment records and current government notifications.