Gratuity is a statutory lump-sum payment made by an employer to an employee as a token of appreciation for long and loyal service. This guide covers eligibility, calculation formulas, tax rules, forfeiture conditions, and key compliance forms under the Payment of Gratuity Act, 1972.
Gratuity is a one-time financial benefit paid by an employer to an employee upon separation from service, provided the employee has completed a minimum qualifying period. It is governed by the Payment of Gratuity Act, 1972, which came into force on 16 September 1972.
The Act mandates gratuity payment for organisations that employ 10 or more persons. Once an establishment crosses this threshold, the Act continues to apply even if the headcount later falls below 10.
An employee becomes eligible for gratuity if any one of the following conditions is met:
| Trigger | Minimum Service Required |
|---|---|
| Retirement or superannuation | 5 years of continuous service |
| Resignation | 5 years of continuous service |
| Death during service | No minimum (paid to nominee/legal heir) |
| Permanent disability due to accident or illness | No minimum (paid irrespective of tenure) |
Continuous service means uninterrupted employment with a single employer. Breaks caused by circumstances beyond the employee's control — such as authorised leave, medical leave, lay-off, or strike not due to the employee's misconduct — do not break the continuity of service.
For employees working in seasonal establishments, a minimum of 75% attendance in a season qualifies as continuous service for that season.
The Payment of Gratuity Act divides non-government employees into two categories. The formula differs depending on which category applies.
| Component | Amount |
|---|---|
| Basic Pay | ₹28,000 |
| Dearness Allowance | ₹10,000 |
| Last Drawn Salary (for gratuity) | ₹38,000 |
| Component | Amount |
|---|---|
| Basic Pay | ₹40,000 |
| Dearness Allowance | ₹12,000 |
| Last Drawn Salary (for gratuity) | ₹52,000 |
Gratuity received is taxable as salary income, but the Income Tax Act provides partial or full exemptions depending on the employee's category.
| Employee Category | Exemption Rule |
|---|---|
| Government employees (Central/State) | Entire gratuity amount is fully exempt from income tax |
| Covered under Payment of Gratuity Act | Exempt up to the least of: actual gratuity received or ₹20 lakh |
| Not covered under the Act | Exempt up to the least of: ₹20 lakh or actual gratuity or ½ month's salary × completed years of service |
While gratuity is a statutory right, employers may withhold or forfeit it in specific situations:
The Payment of Gratuity Act prescribes specific forms for various notifications and claims. Employers and employees must use the correct form to remain compliant.
| Form | Purpose | Filed By |
|---|---|---|
| Form A | Notice of Opening — submitted when the establishment begins operations | Employer |
| Form B | Notice of Change — for changes in employer name, address, or ownership | Employer |
| Form C | Notice of Closure — submitted when the establishment shuts down | Employer |
| Form F | Nomination — employee nominates a beneficiary to receive gratuity in case of death | Employee |
| Form I | Application for Gratuity — claim filed by the eligible employee | Employee |
| Form J | Application for Gratuity — claim filed by nominee or legal heir on employee's death | Nominee / Legal Heir |
| Form L | Notice for Payment of Gratuity — issued by employer confirming the amount payable | Employer |
| Form M | Notice for Rejection — issued by employer when rejecting a gratuity claim, with reason | Employer |
Gratuity must be paid within 30 days from the date it becomes payable. If delayed beyond 30 days, the employer must pay simple interest at the prescribed rate for the period of delay.
| Parameter | Details |
|---|---|
| Governing law | Payment of Gratuity Act, 1972 |
| Applicability | Establishments with 10 or more employees (once covered, always covered) |
| Minimum service | 5 years continuous service (except death/disability) |
| Formula (Act-covered) | (15 × Last Drawn Salary × Years) ÷ 26 |
| Formula (Non-covered) | (15 × Last Drawn Salary × Years) ÷ 30 |
| Tax exemption limit | Up to ₹20 lakh (non-government employees) |
| Payment deadline | Within 30 days of the date gratuity becomes due |