Ankeshan

What is Gratuity?

Last updated: 27 June 2026

Gratuity is a statutory lump-sum payment that an employer must pay to an employee on separation — retirement, resignation, termination, or death — after the employee has completed at least five years of continuous service, calculated as 15 days of last-drawn salary for each completed year of service.

Governed by the Payment of Gratuity Act, 1972 — now also under the Code on Social Security, 2020 (effective 21 November 2025) — gratuity is one of the most significant terminal benefits in Indian employment law.

Gratuity formula

Gratuity = (Last drawn Basic + DA) × 15 × Completed years of service ÷ 26
  • 15 represents 15 days of salary
  • 26 represents the number of working days in a month
  • A service tenure of 6 months or more in the last year is rounded up to the next full year

Example: An employee with 8 years of service and a last drawn Basic + DA of ₹40,000/month receives: ₹40,000 × 15 × 8 ÷ 26 = ₹1,84,615.

Fact box. Gratuity is tax-free up to ₹20 lakh for private-sector employees. Amounts above ₹20 lakh are added to income and taxed at the applicable slab rate. Government employees receive full tax exemption on gratuity. The ₹20 lakh ceiling is long-standing; confirm there has been no upward revision under the latest Code on Social Security central rules before relying on it.

Key 2025 change: fixed-term employees

Under the Code on Social Security (effective 21 November 2025), fixed-term contract employees become eligible for gratuity after just one year of continuous service — down from the general five-year rule. This is a significant change for businesses that rely on fixed-term workers.

Compliance obligations

  • Eligibility: Establishments with 10 or more employees.
  • Exception — death/disability: The five-year rule is waived; gratuity is payable irrespective of tenure.
  • Payment timeline: Within 30 days of the date gratuity becomes payable.
  • Employer contribution to gratuity fund: Employers with 10+ employees may create an approved gratuity fund; contributions are deductible under Section 36(1)(v).

Frequently asked questions

Does an employee who resigns after 4 years 8 months get gratuity? Under the general rule, the employee needs 5 years. However, some courts have held that 4 years 240 days (i.e., 4 full years + 6 months) qualifies since 6 months is rounded up. This is litigated; employers should seek legal advice on the specific fact pattern.

Is the employer liable for gratuity if the employee is fired for misconduct? Partial forfeiture of gratuity is allowed in cases of wilful omission or misconduct causing damage. Complete forfeiture is allowed only if termination is for an offence involving moral turpitude.

Sources: EPFO; Code on Social Security, 2020; Payment of Gratuity Act, 1972

General information, not professional advice. Verify on the official portal for your case. Reviewed by a Chartered Accountant; last updated 27 June 2026.

Related: EPF (Employees' Provident Fund) · ESI · Professional Tax