Gratuity in India 2025: Know The Rules, Calculation Method, and Application Process

Gratuity in India is an important part of an employee’s benefits in India. It acts as a financial cushion for employees, recognizing their service to an organization. The Gratuity act is applicable to those establishments where 10 or more workers have worked at a time in the last 12 months and the employee has rendered 5 years of continuous service. In this guide, we will explore what gratuity is, how it is calculated, the rules governing it, and what happens in cases such as the death of an employee during service. We will also cover the process for claiming gratuity and other essential details.

Gratuity in India: What is Gratuity?

Gratuity in India is a statutory benefit provided to employees as a token of gratitude for their continuous service to an organization. Governed by the Payment of Gratuity Act, 1972, it is payable when an employee leaves the organization after completing at least five years of service, whether due to resignation, retirement, or termination. In some cases, such as death or disability, the five-year rule does not apply.

Gratuity is considered a deferred wage, designed to provide financial security to employees and their families after their employment ends.

Gratuity in India: Eligibility for Gratuity

An employee is eligible for gratuity if:

1. They have completed at least five years of continuous service in an organization.
2. The employer has at least 10 or more employees during the preceding 12 months.

Exceptions to the five-year rule include cases of death or permanent disability.

Gratuity in India: How is Gratuity Calculated?

The formula to calculate gratuity depends on whether the employee is covered under the Payment of Gratuity Act or not.

For Employees Covered under the Act:

The formula is:

Gratuity=(Last drawn salary)×15×(Years of service)÷26

• Last drawn salary includes basic pay and dearness allowance.
• 26 represents the number of working days in a month.
• The gratuity amount is capped at ₹20 lakh.

Example:

If an employee’s last drawn salary is ₹20,000 and they have worked for 10 years:

Gratuity=20,000×15×10÷26=₹1,15,385

For Employees Not Covered under the Act:

Employers may use their own policies, but the common formula is:

Gratuity=(Last drawn salary)×15×(Years of service)÷30

The divisor is 30 instead of 26, which may result in a slightly lower gratuity amount.

Taxability of Gratuity

• For government employees: Gratuity is fully exempt from tax.
• For non-government employees: Gratuity up to ₹20 lakh is tax-exempt. Any amount above this is taxable as per the employee’s income tax slab.

Gratuity in India: Rules and Regulations Governing Gratuity

1. Payment Deadline: Gratuity must be paid within 30 days of its due date. Any delay may attract interest.
2. Nomination: Employees must nominate a beneficiary for their gratuity. This ensures quick disbursement in case of unforeseen events.
3. Termination for Misconduct: Gratuity may be withheld or forfeited if an employee is terminated for gross misconduct.
4. Service Breaks: Periods such as approved leaves or maternity leave are counted as part of continuous service.

Gratuity in India: What Happens if an Employee Dies During Service?

In the unfortunate event of an employee’s death, the gratuity is paid to their nominee(s). If no nomination has been made, the legal heirs of the employee are entitled to receive the gratuity.

Gratuity Calculation in Case of Death:

The gratuity is calculated based on the service period and the salary at the time of death. The formula remains the same as explained earlier. However, the amount may be enhanced if the employer has a group gratuity insurance scheme.

Steps for Nominees or Legal Heirs:

1. Submit the employee’s death certificate.
2. Provide proof of nomination or legal heir certificate.
3. Submit the application for gratuity in Form J under the Payment of Gratuity Act.
4. The employer must disburse the gratuity within 30 days of receiving the application.

Gratuity in India: How to Apply for Gratuity?

Here’s the step-by-step process for claiming gratuity:

For Employees:

1. Notify the Employer: Submit a formal application in Form I to the employer, requesting gratuity payment.
2. Employer’s Response: The employer must calculate the gratuity and send a notice of payment to the employee within 15 days.
3. Payment: Gratuity should be credited to the employee’s account within 30 days.

For Nominees/Legal Heirs (in case of death):

1. Submit Form J along with supporting documents (death certificate, nomination papers, etc.).
2. The employer must verify the claim and process the gratuity within 30 days.
3. If there is any dispute, the case can be escalated to the controlling authority under the Act.

Gratuity in India: Important Points to Note

1. Gratuity Limit: The government periodically revises the tax-exempt gratuity limit. It is currently ₹20 lakh.
2. Dispute Resolution: In case of disputes, employees can approach the controlling authority appointed under the Payment of Gratuity Act.
3. Group Gratuity Plans: Many companies opt for group gratuity insurance schemes, ensuring seamless payment even in cases of financial constraints.
4. Employer’s Obligation: Employers cannot deny gratuity to eligible employees unless they are terminated for misconduct.

Gratuity in India: Frequently Asked Questions (FAQs)

1. What happens if I switch jobs before completing five years?

If you leave an organization before completing five years, you are not eligible for gratuity unless the termination is due to death or disability.

2. Can gratuity be part of my monthly salary?

No, gratuity cannot be paid monthly. It is a lump sum benefit paid at the end of employment.

3. Is gratuity mandatory for all employers?

Yes, gratuity is mandatory for employers with 10 or more employees.

4. Can gratuity be forfeited?

Gratuity can be forfeited if an employee is terminated for misconduct involving moral turpitude or criminal offenses.

5. How is continuous service calculated?

Continuous service includes all approved leaves, holidays, and any period of absence due to accidents or maternity leave.

6. What if the employer refuses to pay gratuity?

Employees can file a complaint with the controlling authority under the Payment of Gratuity Act.

Gratuity is a vital component of employee benefits, providing financial security and recognition for dedicated service. Understanding the rules and processes ensures that you can claim what you rightfully deserve with ease.