Who is eligible for gratuity and how is it calculated?

By the India Law Simplified editorial team · Verified against the bare Acts & official portals · Updated 2026-08-18 · ~8 min read

⚡ Quick answer

Under the Payment of Gratuity Act, you're eligible for gratuity after completing 5 years of continuous service with the same employer (the 5-year rule is waived if employment ends due to death or disablement). It's calculated as: (last drawn basic salary + DA) × 15/26 × number of completed years of service. For employees covered by the Act, gratuity up to ₹20 lakh is exempt from income tax.

Use the free gratuity calculator →

Gratuity is a lump-sum reward your employer pays for your long service — effectively a thank-you for sticking around. Many employees don't realise they're entitled to it, or how it's calculated. This guide explains who qualifies, the exact formula with a worked example, the 5-year rule (and its exceptions), and how much of it is tax-free, in plain language.

1Who is eligible

Gratuity under the Payment of Gratuity Act applies to establishments with 10 or more employees, and you qualify when:

You complete 5 years of continuous service with the same employer, AND
Your employment then ends — by resignation, retirement, or termination

⚠️ ImportantThe 5-year requirement is waived if employment ends due to death or disablement — in those cases gratuity is paid regardless of how long you served, with the death gratuity going to your nominee.

2The calculation formula

For employees covered by the Act, the formula is:

Gratuity = (last drawn basic salary + DA) × 15/26 × number of completed years of service
'15/26' represents 15 days' wages for each completed year (26 working days in a month)
A part-year of 6 months or more counts as a full year; less than 6 months is ignored

💡 ExampleSuppose your last drawn basic + DA is ₹50,000 a month and you served 10 years and 7 months. Years counted = 11 (since 7 months rounds up). Gratuity = ₹50,000 × 15/26 × 11 = ₹3,17,308. All of it is tax-free, as it's well under the ₹20 lakh limit.

3How much is tax-free

Gratuity gets favourable tax treatment, but the exemption depends on your category:

Government employees: gratuity is fully tax-free
Employees covered by the Payment of Gratuity Act: exempt up to ₹20 lakh (the least of ₹20 lakh, the actual gratuity, or the formula amount)
Anything above the exemption limit is taxable as salary

4Claiming your gratuity

The process is simple, and the employer is bound to pay:

Apply to your employer (Form I) within 30 days of becoming eligible, though the right isn't lost by a delay
The employer must pay the gratuity within 30 days of it becoming payable
If they don't, they owe simple interest on the delayed amount, and you can approach the controlling authority under the Act

✅ TipMake sure you've nominated someone (Form F) for your gratuity early in your job — it ensures the amount goes smoothly to your chosen person, especially the death gratuity.

5The four years and 240 days question

The Act requires five years of continuous service, but 'continuous service' is defined rather than counted in calendar years, and that definition is where the well-known exception comes from.

A year in which an employee has worked for at least 240 days — 190 in a mine or an establishment working fewer than six days a week — is treated as a year of continuous service. Several High Courts, notably Madras, have read this to mean that four years and 240 days in the fifth year qualifies.

The position is not uniform across the country and many employers apply the strict five-year rule until directed otherwise. It is worth claiming, but it is a claim, not a certainty.

⚠️ ImportantThe five-year requirement does not apply at all where service ends due to death or disablement. In that case gratuity is payable however short the service.

6The formula differs if your employer is not covered by the Act

The Payment of Gratuity Act applies to establishments with ten or more employees. Where an employer falls outside it but pays gratuity anyway, the calculation and the tax treatment both change.

For a covered employer the formula is last drawn salary × 15/26 × completed years, with any part-year above six months rounded up. For an employer not covered, the exempt amount is computed on half a month's average salary for each completed year — using 15/30 rather than 15/26, and averaging the last ten months' salary rather than taking the last drawn figure.

The ₹20 lakh ceiling is a lifetime limit across all employers, not per employment, so a second gratuity later in a career is exempt only up to the unused balance.

7Timelines, interest, and when gratuity can be forfeited

Gratuity is payable within thirty days of it becoming due, and the employer must pay it whether or not you apply for it.

Delay beyond thirty days attracts simple interest from the due date to the date of payment, at the rate notified by the Central Government — which is a statutory entitlement, not a concession.

Forfeiture is possible but narrow. Gratuity may be forfeited to the extent of damage or loss where services were terminated for wilful damage to the employer's property, and wholly where termination was for riotous or disorderly conduct, any act of violence, or an offence involving moral turpitude committed in the course of employment. Ordinary poor performance or resignation on bad terms is not a ground.

✅ TipApply in Form I even if the employer says it is automatic. A dated application starts the thirty-day clock and the interest entitlement.

8What counts as salary in the formula

The figure that goes into the calculation is not your CTC and not your gross pay.

For a covered employer, wages mean basic salary plus dearness allowance. House rent allowance, conveyance, special allowance, bonus and other allowances are excluded, which is why gratuity on a large package is often smaller than employees expect.

Where salary is on a piece-rate basis, the average of the last three months is used. For seasonal establishments the rate is seven days' wages for each season rather than fifteen days.

⚠️ ImportantThis is also why a salary structure heavy on allowances and light on basic reduces gratuity, along with EPF — a trade-off worth understanding before agreeing to a restructure.

Key takeaways

Gratuity is payable after 5 years of continuous service (waived on death or disablement).
Formula: (last basic + DA) × 15/26 × completed years; 6+ months rounds up to a full year.
It applies to establishments with 10 or more employees.
Gratuity up to ₹20 lakh is tax-free for Act-covered employees (fully tax-free for government staff).
Employers must pay within 30 days, with interest if delayed.

Frequently asked questions

Can I get gratuity before 5 years?

Generally no — 5 years of continuous service is required. The only exceptions are death or disablement, where gratuity is paid regardless of the length of service.

How is gratuity calculated?

For covered employees: (last drawn basic + DA) × 15/26 × number of completed years of service. A part-year of 6 months or more counts as a full year. So ₹50,000 × 15/26 × 11 years ≈ ₹3.17 lakh.

Is gratuity taxable?

Government employees' gratuity is fully tax-free. For employees covered by the Payment of Gratuity Act, gratuity is exempt up to ₹20 lakh; any amount above that is taxed as salary.

Does 4 years and 7 months count as 5 years for gratuity?

Some High Court rulings have treated 4 years and 240+ days of service in the fifth year as eligible, but this isn't uniformly applied. As a rule, plan around the full 5 years of continuous service to be certain of eligibility.

Is 4 years and 240 days really enough?

Several High Courts, notably Madras, have read the definition of continuous service that way, because a year with at least 240 days worked counts as a full year. The position is not uniform nationally and many employers apply the strict five-year rule until directed otherwise, so treat it as a claim worth making rather than a certainty.

Does my employer have to pay it if I never applied?

Yes. Gratuity becomes payable within thirty days of falling due whether or not you apply, and delay beyond that attracts simple interest at the notified rate from the due date. Still file Form I, because a dated application makes the timeline and the interest entitlement easy to prove.

Can an employer refuse to pay gratuity?

Only in narrow circumstances. It can be forfeited to the extent of the loss where services were terminated for wilful damage to the employer's property, and wholly where termination was for riotous or disorderly conduct, violence, or an offence involving moral turpitude in the course of employment. Poor performance or an acrimonious resignation is not a ground.

Is the ₹20 lakh exemption per job or for life?

For life. It is a cumulative ceiling across all employers, so gratuity received from an earlier employer uses up part of it and a later gratuity is exempt only against the unused balance.

Which part of my salary is used in the gratuity formula?

Basic salary plus dearness allowance only. HRA, conveyance, special allowance and bonus are excluded, which is why gratuity on a large package is often smaller than expected — and why a structure heavy on allowances quietly reduces both gratuity and EPF.