Gratuity Rules and Calculation Guide for India

Who Is Covered Under the Gratuity Rules

The Payment of Gratuity Act, 1972 applies to factories, mines, oilfields, plantations, ports, railway companies, and shops and establishments employing ten or more persons, along with other notified establishments. Once an establishment is covered, it generally continues to be covered even if headcount later falls.

Employers not covered by the Act may still pay gratuity under their own policy or employment contract. Check your coverage position carefully, especially if you operate across several locations in Rajasthan or other states.

Gratuity Eligibility: The Five-Year Rule

Under the Act, an employee generally becomes eligible for gratuity after completing five years of continuous service. Gratuity becomes payable on:

• Resignation or retirement after five years of continuous service
• Superannuation
• Death or disablement due to accident or disease, where the five-year condition does not apply

What counts as continuous service, including breaks and authorised leave, has detailed rules and court interpretations. Take professional advice in borderline cases rather than relying on a simple day count.

Gratuity Calculation Formula

For employees covered under the Act, the standard formula is:

• Gratuity = 15/26 x last drawn salary x completed years of service

Here, salary generally means basic pay plus dearness allowance. The figure 15 represents fifteen days' wages for each year, and 26 represents working days in a month. For covered employees, a final part-year of more than six months is generally counted as a full year.

A different method may apply for employees not covered by the Act, particularly for income tax purposes, so check the current rule before calculating.

A Simple Gratuity Calculation Example

Consider an illustrative case. An employee in a covered establishment has a last drawn basic plus DA of Rs 26,000 per month and has completed 8 years and 7 months of service.

• Service counted: 9 years, because the final part-year exceeds six months
• Gratuity = 15/26 x 26,000 x 9
• Gratuity = 15,000 x 9 = Rs 1,35,000

This is an example only. Actual gratuity depends on salary definitions in your records, service rules and any ceiling that applies.

Payment Timelines, Ceilings and Tax

Under the Act, the employer should pay gratuity within 30 days of it becoming payable, and delays can attract interest. Keep the employee's nomination details updated so dues can be paid quickly in case of death.

The Act sets a maximum gratuity amount, and income tax law sets an exemption limit for gratuity received. Both have been revised over time and may change again, so check the current ceiling on the Ministry of Labour and Employment and Income Tax portals. Many employers fund future liability through group gratuity schemes; insurance solutions for businesses can be explored for this.

Gratuity Under the Code on Social Security

The Code on Social Security, 2020 consolidates several labour laws, including gratuity. It introduces changes such as gratuity eligibility for fixed-term employees after one year of service and a broader definition of wages, which may increase the base used for gratuity in some salary structures.

Implementation dates, rules and state notifications matter, so check the current notified position before changing salary structures or policies. Compliance management services can help track such changes, and MSME legal services can review contracts for fixed-term staff.

Managing Gratuity in Your HRMS

Gratuity errors usually come from wrong joining dates, missing service breaks or outdated salary data. An HRMS that maintains accurate service records and salary history makes calculation and provisioning easier. Our guide to payroll compliance for PF, ESI and TDS explains how statutory benefits connect with payroll, and the WorkforceOS features page outlines payroll and compliance tools.

To see how ATTPL WorkforceOS can support gratuity tracking and F&F, contact the WorkforceOS team.

Key takeaway: Gratuity under the Act generally needs five years of continuous service and uses the 15/26 formula, but ceilings, tax limits and the Code on Social Security require checking current rules.

Frequently asked questions