TL;DR: Gratuity is a statutory lump sum an employer pays an employee who completes five years of continuous service, calculated as last drawn basic plus dearness allowance multiplied by 15, divided by 26, multiplied by years of service. The five year rule does not apply if the employee dies or is disabled in service. The current statutory ceiling is ₹20 lakh, and gratuity up to that ceiling is tax exempt under section 10(10) of the Income Tax Act.

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What the Payment of Gratuity Act, 1972 covers

The Payment of Gratuity Act, 1972 is the central statute governing gratuity in India. It applies to every factory, mine, oilfield, plantation, port, and railway company.

It also applies to every shop or establishment where ten or more persons are employed, or were employed, on any day in the preceding twelve months, under section 1(3). Once an establishment crosses that threshold, the Act keeps applying even if headcount later falls below ten.

State governments can also extend the Act to other classes of establishments by notification, so shops and commercial establishments in most states are covered. The Act applies to all employees irrespective of designation, including workers, supervisors, and managers, as long as they are “employees” under section 2(e), and there is no salary ceiling for eligibility.

Gratuity is separate from provident fund and separate from any bonus or leave encashment. It is a distinct, employer funded retirement benefit that many employees only think about when they resign or retire.

The five year continuous service rule

Section 4(1) of the Act says gratuity is payable to an employee on the termination of employment after the employee has rendered continuous service for not less than five years. Termination here includes resignation, retirement, superannuation, and death or disablement (with an important exception covered below).

“Continuous service” is defined in section 2A. It means uninterrupted service, including service interrupted by sickness, accident, leave, absence without leave (if not treated as a break under standing orders), lay-off, strike, lockout, or cessation of work not due to the employee’s fault.

Section 2A also has a deeming provision for employees who have not actually worked through the year. An employee is deemed to be in continuous service for a year if they have worked at least 190 days in an establishment working below ground in a mine, or one that works fewer than six days a week.

For every other establishment, the number is 240 days in a year, and this is the figure most HR teams and lawyers actually work with.

The five year requirement is calculated from the date of joining to the last date of employment, not from the date of confirmation. Probation and training periods generally count toward continuous service unless the employment contract clearly treats them as a separate, non continuous engagement.

The 4 years 240 days question

A recurring dispute is whether an employee who completes 4 years and 240 days in the fifth year, but not a full 240 more days beyond that, qualifies for gratuity. Many employers stop the gratuity clock strictly at the five year anniversary date.

The judicial trend, built on reading section 2A together with section 4(1), takes a different view. Once an employee completes 240 days of actual work in the fifth year of service, that year is deemed a full year of continuous service under section 2A(2).

On that reading, an employee who has completed four full years plus 240 days of work in the fifth year has completed five years of continuous service in the eyes of the Act. Several High Courts and the Madras High Court in particular have taken this view in cases dealing with the interplay of sections 2A and 4.

This is a genuinely contested area and employers frequently resist it. If you are close to the five year mark and are being separated, get your attendance and leave records before you exit, since they are the primary evidence for a 240 day claim.

Because the case law varies by jurisdiction, do not rely on a single judgment to settle your claim. Treat the 240 day argument as a strong position to raise before the Controlling Authority, not a guaranteed entitlement, and check the specific precedent in your own High Court before you file.

The gratuity formula explained

For employees covered under the Act, section 4(2) sets out the calculation. Gratuity equals fifteen days’ wages for every completed year of service, or part thereof in excess of six months, based on the rate of wages last drawn.

The formula used in practice is:

Gratuity = (Last drawn basic + DA) x 15 x number of years of service / 26

The 26 in the denominator represents the assumed number of working days in a month (a six day work week). The 15 represents fifteen days of wages for each year worked.

“Wages” for this formula means basic pay plus dearness allowance only. It excludes house rent allowance, conveyance, bonus, overtime, and other allowances, even if those allowances form a large part of the employee’s total compensation.

If an employee has worked for more than six months in the last year of service, that part year is rounded up to a full year for the purpose of the calculation. If the excess is six months or less, it is ignored.

For employees not covered under the Act, but who receive gratuity under a company scheme, employers typically use a formula of (Basic + DA) x 15 x years of service / 30, since there is no statutory requirement to use 26. This distinction between covered and non-covered employees is an easy point of confusion in salary negotiations and should always be checked against the specific employer’s policy.

Worked examples of gratuity calculation

Example one. An employee’s last drawn basic plus DA is ₹40,000 a month and they have completed exactly 10 years of service. Gratuity equals 40,000 x 15 x 10 / 26, which comes to ₹2,30,769.

Example two. An employee’s last drawn basic plus DA is ₹60,000 a month and they have completed 12 years and 7 months of service. Since 7 months exceeds 6 months, the service period is rounded up to 13 years.

Gratuity equals 60,000 x 15 x 13 / 26, which comes to ₹4,50,000.

Example three. An employee’s last drawn basic plus DA is ₹1,00,000 a month and they have completed 30 years of service at a senior level. The raw calculation is 1,00,000 x 15 x 30 / 26, which equals ₹17,30,769.

That figure is below the current ₹20 lakh ceiling, so the employee receives the full ₹17,30,769. Had the raw calculation exceeded ₹20 lakh, the ceiling would have capped the payout.

Example four for a seasonal establishment. For employees of a seasonal establishment, a proviso to section 4(2) provides a different rate. Gratuity is payable at the rate of seven days’ wages for each season of work, rather than the 15 day formula used for regular establishments.

The statutory ceiling on gratuity

Section 4(3) of the Act caps the amount of gratuity payable. This ceiling has been revised over time by government notification, moving from ₹10 lakh to its current level of ₹20 lakh, effective from 29 March 2018.

The ceiling applies to the aggregate gratuity an employee can receive under the Act. Employers can, and many do, pay gratuity above ₹20 lakh as an ex gratia payment or under an internal policy, but that excess amount is not enforceable under the Act and does not carry the same tax treatment.

The ceiling is a floor on what the law compels an employer to pay, not a cap on generosity. A written company policy promising more than the statutory ceiling is enforceable as a matter of contract, separate from the Act.

Government employees have their own gratuity rules under service regulations, which have historically tracked the private sector ceiling but sit outside this Act.

Gratuity on death or disablement

Section 4(1)(a) is one of the most important protective provisions in the Act. It carves out an explicit exception to the five year rule: the requirement of five years’ continuous service does not apply where the termination of employment is due to death or disablement.

If an employee dies while in service, however short their tenure, their nominee or legal heir is entitled to gratuity computed on the same 15/26 formula, using the years of service actually completed. A person who joins a company and passes away after eighteen months is still entitled to gratuity for those eighteen months of service.

The same rule applies to disablement, meaning any disablement that incapacitates the employee for the work they were doing before the disablement occurred. The employee does not need to have completed five years for a disability related exit to attract gratuity.

Nomination matters enormously here. Under section 6, every employee who has completed one year of service must make a nomination in Form F, naming one or more family members (or, if none, any other person) to receive the gratuity on death.

If a valid nomination exists, the employer pays the nominated person directly, avoiding delay. If no nomination was filed, the employer must pay the legal heirs, and establishing heirship through a succession certificate can take considerably longer.

HR teams should treat nomination collection as a first day formality, not an afterthought, given how much smoother it makes the death benefit process.

Forfeiture under section 4(6)

Section 4(6) allows an employer to forfeit gratuity, but the grounds are narrow and must be read strictly. This is not a general power to withhold gratuity whenever an employer is dissatisfied with an exiting employee.

Under section 4(6)(a), gratuity payable to an employee can be wholly or partially forfeited to the extent of the damage or loss caused, if the employee’s services were terminated for any act, wilful omission, or negligence causing damage or loss to the employer’s property. The forfeiture in this branch is capped at the actual financial loss caused, not an arbitrary amount.

Under section 4(6)(b), gratuity can be wholly forfeited if the employee’s services were terminated for riotous or disorderly conduct, or any act of violence, or for an offence involving moral turpitude, provided that offence was committed in the course of the employee’s employment.

Both grounds require that the termination itself was for the specified misconduct, and courts have consistently held this means a proper domestic inquiry with a finding on that specific ground. An employer cannot simply assert misconduct after the fact; the termination order and disciplinary record must actually support the ground being invoked.

Courts have also held that a mere resignation, or a termination for unrelated performance reasons, cannot be recharacterised later as forfeiture grounds. If your gratuity has been withheld citing section 4(6), ask for the specific finding and inquiry record behind it, since a vague, after the fact justification is vulnerable to challenge.

Form I and the thirty day payment rule

The recovery process for an employee begins with the application. Under rule 7 of the Payment of Gratuity (Central) Rules, an employee entitled to gratuity, or their authorised representative in case of death or incapacity, must apply to the employer in Form I.

The application can be made even before the entitlement crystallises, or within thirty days from the date the gratuity becomes payable. The rules also allow the Controlling Authority to condone a delay in filing Form I if there is sufficient cause.

Once a valid claim is made, section 7(3) requires the employer to determine the amount and pay it within thirty days from the date it becomes payable, generally the employee’s last working day. This clock runs whether or not the employee has applied, since section 7(2) requires the employer to determine and notify the gratuity amount on its own.

Section 7(3A) is the interest provision. If the employer does not pay within the thirty day window, the employer is liable to pay simple interest on the amount from the date it fell due until the date of actual payment, at a rate notified by the central government.

The interest liability does not apply if the delay was caused by the employee’s fault and the employer has deposited the amount with the Controlling Authority. This is a narrow exception, and the burden is on the employer to show the delay was genuinely attributable to the employee.

The Controlling Authority and appeal under section 7(7)

If gratuity is not paid, disputed in amount, or the employer denies eligibility altogether, section 7(4) allows the employee to approach the Controlling Authority appointed under the Act for the area. This is typically an officer designated under the Labour Department at the district or regional level.

The Controlling Authority has the powers of a civil court for the limited purposes of the Act, including summoning witnesses and requiring production of documents. After hearing both sides, it determines the amount payable and directs the employer to pay it, with interest where applicable.

Under section 8, if the employer fails to comply, the amount becomes recoverable as arrears of land revenue through the district collector, a stronger mechanism than an ordinary civil decree.

Section 7(7) provides the appeal route. A person aggrieved by an order of the Controlling Authority may prefer an appeal to the appellate authority (usually the appropriate government or its designated officer) within sixty days of the receipt of the order.

An employer’s appeal is subject to a condition: under the proviso to section 7(7), no appeal by an employer is entertained unless the disputed amount has been deposited with the appellate authority. This deposit requirement exists to prevent employers from using the appeal to delay payment indefinitely.

Tax exemption under section 10(10)

Gratuity received by an employee is generally taxable as “income from salary,” but section 10(10) of the Income Tax Act, 1961 provides a specific exemption. The exemption rules differ depending on the category of employee.

For a government employee (central or state government), the entire gratuity received on retirement, death, or termination is fully exempt from tax, with no monetary ceiling.

For an employee covered under the Payment of Gratuity Act, the exemption is the least of three amounts: the actual gratuity received, fifteen days’ salary (calculated on the last drawn salary) for each completed year of service or part in excess of six months, or the statutory ceiling of ₹20 lakh (aggregated across the employee’s lifetime if they have received gratuity from more than one employer).

For an employee not covered under the Act, the exemption is the least of the actual amount received, half a month’s average salary for each completed year of service, or ₹20 lakh.

Any amount above the exempt limit is taxable as salary income in the year of receipt. Gratuity received on death is taxable in the hands of the legal heirs, but the same exemption limits apply.

How the Code on Social Security 2020 changes gratuity

The Code on Social Security, 2020 consolidates nine existing labour welfare laws, including the Payment of Gratuity Act, into a single code. The Code has been passed by Parliament, but as of August 2026 its gratuity-related provisions are not yet notified into force in most states, and the Payment of Gratuity Act, 1972 continues to be the operative law until the transition is completed state by state.

The most significant change under the Code, once notified, is extending gratuity eligibility to fixed-term employees. Section 2(34) defines fixed-term employment, and a fixed-term employee is entitled to gratuity on a pro-rata basis, without needing to complete five years of continuous service.

This reverses one of the biggest gaps in current law, since fixed-term and short-contract employees today are often denied gratuity purely because their contract ends before the five year mark.

The Code also retains the basic 15/26 formula structure, though its uniform “wages” definition, which caps certain allowances, may change how “last drawn wages” is computed for employees with a high proportion of allowances in their pay structure.

Working journalists continue to have a shorter three year threshold under the Code. Employers should track the state-wise notification schedule closely, since until notification, section 4(1)‘s five year rule remains the governing standard even for fixed-term staff.

Step by step recovery plan for unpaid employee

If your employer has not paid gratuity you believe is due, follow a structured process rather than relying on informal follow-ups alone.

Step one: confirm eligibility on paper. Gather your appointment letter, all salary slips (especially the last one, since it fixes the “last drawn” figure), your relieving letter or termination letter, and your attendance or leave records for the final year.

Step two: calculate the exact amount. Use the 15/26 formula on your last drawn basic plus DA, applying the ₹20 lakh ceiling if relevant, and note the date the amount became “payable,” which is usually your last working day.

Step three: send a written demand. Submit Form I to your employer, or if you cannot access the prescribed form, send a clear written letter referencing the Payment of Gratuity Act, 1972 and asking for payment within the statutory thirty day period. The same drafting discipline used to draft a legal notice applies here: state the facts, the amount claimed, and the deadline clearly, and keep proof of delivery.

Step four: wait out the statutory window, then escalate. If thirty days pass from the date gratuity became payable without payment, the employer is already accruing interest liability under section 7(3A). At this point, you can approach the Controlling Authority for the area where your workplace is located.

Step five: file before the Controlling Authority. File your application in the prescribed form along with your calculation, proof of employment, proof of your demand notice, and any correspondence showing the employer’s refusal or silence. The Controlling Authority will issue notice to the employer and conduct a hearing.

Step six: seek interest and, if warranted, invoke forfeiture defences. If the employer raises section 4(6) as a defence, be ready to show that no domestic inquiry took place, or that the inquiry findings do not match the ground being claimed, since that is usually the weakest point in an employer’s forfeiture argument.

Step seven: enforce the order. If the Controlling Authority rules in your favour and the employer still does not pay, request recovery as arrears of land revenue under section 8, which routes enforcement through the district collector’s office rather than a fresh civil suit.

Step eight: consider the appeal timeline. Whether you win or lose before the Controlling Authority, remember the sixty day window under section 7(7) runs from the date of receipt of the order, so calendar that date immediately.

Throughout this process, keep every document dated and in writing. Gratuity disputes are decided heavily on the paper trail: the appointment letter, the last salary slip, the separation date, and the demand notice.

Gratuity compliance checklist

AreaCompliant employer practiceCommon gap
Coverage thresholdTrack headcount monthly; Act applies once 10+ crossed even onceAssuming the Act does not apply because current headcount is below 10
NominationForm F collected within one year of joining for every employeeNo nomination on file, causing delay on death claims
240 day trackingHR flags employees nearing 4 years plus 240 daysStrict five year anniversary cut-off applied mechanically
Payment timelineGratuity computed and paid within 30 days of separationPayment delayed pending “full and final settlement” for months
Interest on delayInterest calculated and paid automatically for late paymentInterest ignored unless the employee specifically demands it
ForfeitureApplied only after a proper domestic inquiry on the specific groundGratuity withheld informally citing vague “misconduct”
Ceiling application₹20 lakh ceiling applied correctly, with any excess as ex gratia if offeredCeiling misapplied to reduce gratuity below the statutory minimum
Tax treatmentExemption computed correctly under section 10(10) at the time of Form 16 issuanceFull gratuity shown as taxable without applying the exemption

How Niyam helps with gratuity disputes

Gratuity disputes usually turn on a small number of contested facts: the exact date of separation, whether 240 days were completed in the final year, and whether a forfeiture ground genuinely applies. Niyam helps at each of these points.

Research grounded in real judgments. When you need to know how a particular High Court has interpreted the interplay between section 2A and section 4(1) on the 240 day question, Niyam’s research tool searches across 72,000+ Indian judgments and returns citations you can verify, not generic summaries. This is especially useful for in-house counsel handling a batch of separations where several employees are near the five year mark.

Drafting the demand and the Controlling Authority application. Niyam’s drafting tools help build a properly worded Form I covering letter, a demand notice citing the correct sections, and a structured application for filing before the Controlling Authority. Getting the calculation and the section references right the first time avoids unnecessary rounds of correspondence.

Citator for tracking gratuity law. The Code on Social Security’s staggered notification means the applicable law can change for an employer’s establishment while their gratuity policy stays static. Niyam’s Citator flags when relevant judgments or notifications change the position you are relying on.

Matters management for HR and legal teams. Employers managing multiple exits and gratuity calculations at once can use Niyam’s Matters feature to track each employee’s separation date, calculation, payment status, and any pending Form I applications in one place.

Gratuity disputes often sit alongside other exit related questions, including wrongful termination remedies and disputes over notice period buyouts. Niyam’s research capabilities cover this broader employment law landscape as well.

Frequently asked questions

Is there a minimum salary requirement for gratuity eligibility?

No. Unlike some other labour statutes, the Payment of Gratuity Act has no wage ceiling for eligibility. Every employee under the Act’s definition, regardless of designation or salary level, is entitled to gratuity once they complete the required service.

Does an employee need to resign in writing to claim gratuity?

Gratuity is payable on “termination of employment,” which includes resignation, retirement, and dismissal (subject to forfeiture rules). There is no requirement that the resignation take a specific written form beyond what your employment contract requires, but a clear, dated resignation or relieving letter is important evidence for fixing the date gratuity became payable.

Can an employer deduct notice period shortfall from gratuity?

Notice period recovery and gratuity are governed by different legal frameworks, and an employer generally cannot deduct notice pay shortfall directly from gratuity unless the employment contract or standing orders specifically provide for such adjustment and it does not amount to forfeiture beyond what section 4(6) allows. Many employers instead recover notice shortfall from the final salary or a security deposit rather than gratuity itself.

What happens to gratuity if the company is sold or merged?

When an establishment is transferred, whether by sale, merger, or amalgamation, the successor employer becomes liable for gratuity accrued during the employee’s service with the predecessor, provided the employee’s service is treated as continuous under the transfer arrangement. Employees should confirm this continuity is documented at the time of the transfer.

Can gratuity be paid in instalments?

The Act’s general scheme under section 7 contemplates a single lump sum payment within thirty days, not staggered instalments. Compensation ordered under section 4(6) forfeiture for loss can be adjusted, but voluntary instalment arrangements outside statutory timelines should be documented carefully to avoid disputes over interest liability.

Is gratuity payable to an employee who is dismissed for poor performance?

Yes, ordinarily. Poor performance is not one of the two narrow grounds under section 4(6), which limits forfeiture to loss caused by wilful misconduct or negligence, or riotous conduct and offences involving moral turpitude during employment. A performance based termination does not attract forfeiture.

How is “last drawn wages” determined if an employee was on unpaid leave before leaving?

“Last drawn wages” generally refers to the wage rate applicable to the employee immediately before separation, not the actual amount received in a month where unpaid leave reduced take-home pay. The calculation uses the rate, meaning the basic plus DA figure the employee would have earned in a full month at that time.

Does gratuity apply to apprentices and trainees?

Apprentices engaged under the Apprentices Act, 1961 are generally excluded from the definition of “employee” under the Payment of Gratuity Act, since their engagement is treated as training rather than employment. Trainees who are not formal apprentices but are treated as regular employees for other purposes may have a stronger claim, depending on the actual terms of engagement.

Can an employee waive their right to gratuity through a settlement agreement?

Section 14 of the Act gives it overriding effect over anything inconsistent in any other enactment, instrument, or contract. Courts have generally been reluctant to enforce a blanket waiver of statutory gratuity rights in a private settlement, though a settlement can validly quantify and settle the actual amount payable.

What is the difference between gratuity and provident fund?

Provident fund is a savings scheme with contributions from both employer and employee, accumulated in the employee’s own account and payable with interest regardless of tenure beyond short minimums. Gratuity is a one-time payment funded entirely by the employer, contingent on completing five years of continuous service (except in death or disablement), calculated on a fixed formula rather than accumulated contributions.

Are contract workers hired through a manpower agency eligible for gratuity?

Eligibility depends on who is the actual “employer” for the purposes of continuous service, which is a frequently litigated question. If the principal employer directly controls and supervises the contract worker over a continuous period spanning multiple agency contracts, courts have sometimes clubbed the service period across agencies to reach the five year threshold, but this is fact specific and often contested.

Does gratuity apply during the probation period?

Probation is a phase of employment, not a separate category excluded from continuous service, so time spent on probation generally counts toward the five year requirement unless the specific appointment letter treats it as a distinct, non-continuous engagement (which is unusual and would itself likely be challenged).

What if the employer has closed down and cannot be traced?

If an establishment closes, gratuity liability does not disappear, and the employee can still approach the Controlling Authority, which can direct recovery from any traceable assets or against the individuals responsible for the establishment, depending on its legal structure. Where the employer is a company under liquidation, gratuity dues rank as a priority claim under insolvency law in many circumstances.

Is there a separate gratuity rule for daily wage or casual workers?

Casual and daily wage workers are covered as “employees” if they otherwise meet the continuous service requirement, including the 240 day deeming rule under section 2A. The nature of engagement being casual does not by itself disqualify a worker, and the same continuity questions that arise in daily wage regularisation claims are often relevant evidence here.

Can an employee claim gratuity twice from the same employer for two separate spells of employment?

Yes, if an employee resigns, is paid gratuity, and later rejoins the same employer, a fresh five year period generally begins for the second spell, and gratuity is calculated separately for that spell, subject to the lifetime ceiling under section 10(10) for tax exemption purposes.

What documents should an employer retain to defend a gratuity claim?

Employers should retain the appointment letter, attendance and leave records, any domestic inquiry proceedings relied upon for forfeiture, the separation letter, the Form I application if filed, and proof of the gratuity computation and payment, including bank transfer records, for the limitation period applicable to such claims.

Does maternity leave affect the 240 day calculation?

Under section 2A, periods of leave, including maternity leave sanctioned in accordance with law, are treated as part of continuous service and generally count toward the days worked for the purpose of the deeming provision. This continuity principle mirrors the protections discussed in maternity benefit rules for adoptive mothers, where sanctioned leave does not break statutory entitlement.

Can gratuity be attached by a court in recovery proceedings against the employee?

Section 13 of the Act protects gratuity payable under the Act from attachment in execution of any decree or order of a civil, revenue, or criminal court, recognising gratuity as a welfare payment meant to reach the employee or their family.

Is there a time limit for an employee to claim gratuity if they never applied earlier?

While Form I nominally has a thirty day filing window from when gratuity becomes payable, the Controlling Authority has power to condone delay for sufficient cause, and gratuity claims filed years after separation have been entertained where the delay is satisfactorily explained, since gratuity is treated as a continuing statutory obligation on the employer rather than a claim that lapses quickly.

How does the ₹20 lakh ceiling interact with multiple employers over a career?

The ₹20 lakh figure for tax exemption under section 10(10) is a lifetime aggregate limit across all employers, meaning if an employee has already claimed the full exempt amount from a previous employer, a subsequent gratuity payment’s exempt portion is reduced accordingly, even though each individual employer’s payment obligation under the Act is assessed independently.

Key takeaways

Getting gratuity right, whether you are an employee calculating what you are owed or an employer building a compliant process, comes down to a handful of recurring points.

  • Five years of continuous service is the general rule, but death and disablement are full exceptions with no minimum tenure.
  • The 240 day deeming rule under section 2A can bring an employee to the five year threshold even without a literal five calendar years, though this argument should be backed by attendance records and checked against your jurisdiction’s case law.
  • The formula is (last drawn basic plus DA) x 15 x years of service, divided by 26, capped at the current statutory ceiling of ₹20 lakh.
  • Forfeiture under section 4(6) is narrow, tied to proven misconduct through a proper inquiry, and cannot be invoked loosely.
  • Employers must pay within thirty days of separation or start accruing interest under section 7(3A).
  • The Controlling Authority route under section 7, with appeal under section 7(7) within sixty days, is the primary enforcement mechanism for unpaid gratuity.
  • Gratuity up to the prescribed limits is tax exempt under section 10(10) of the Income Tax Act, with different rules for government employees, covered employees, and non-covered employees.
  • The Code on Social Security 2020 will extend pro-rata gratuity to fixed-term employees once notified, but until then the Payment of Gratuity Act, 1972 remains the governing law.

For employees pursuing an unpaid claim or employers building a defensible process, Niyam’s research and drafting tools keep the calculation and the correspondence grounded in the actual statute and verifiable precedent. This sits alongside other exit related legal questions, from PF withdrawal disputes to broader labour codes changes, where getting the current law right matters.

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