BAJAJ BROKING
July 18, 2025
6 mins read
In 1972, the Payment of Gratuity Act was introduced as a key legislation in India. It is an act that mandates employers to provide a lump sum financial benefit to employees who have rendered long-term service.
Gratuity serves as a token of appreciation and financial security during retirement and it plays a vital role in employee welfare, with clear eligibility rules, calculation methods, and employer obligations under the Act. In this guide, we will discuss all about gratuity, its calculation, and more.
Gratuity is a benefit that is payable by employers to employees at the end of service as a token of appreciation for their long service. Under the Payment of Gratuity Act, 1972, it is applicable in establishments with 10 or more employees. It is determined by the final salary earned by the employee, including a number of years served in employment, and provides security after the employee retires or quits the job due to any cause, death, or disability.
Source: Livemint
Gratuity serves as retirement protection, where the employees receive something worthy of their many years of service. It raises the morale of the employees, they feel assured that their job is not going to end soon, and they are induced to be loyal to the workplace. Moreover, the Act enforces gratuity, thus fostering goodwill and professionalism in organisations, thus a structured social protection framework that is fair.
According to the Payment of Gratuity Act, 1972, employers who employ 10 or more workers are bound by the law to provide gratuity to those who leave, retire, die, or become incapacitated.
The five-year continuous service entitles employees to gratuity, with the definition of the working year being, in the case of non-seasonal workers, it is 240 days minimum (and 190 days for underground workers). Also considered for completion of the year are those who serve over six months in the last year in office. There are exceptions in the case of death or disability, and the five-year rule does not apply.
This is covered in factories, mines, plantations, ports, railways, and shops, and establishments employing 10+ persons. Gratuity is payable within 30 days of exit, retirement, death, or disability, and delayed discharge is to be paid interest.
Source: Livemint
After one year of service, an employee is then asked to submit a nomination (Form F); otherwise, gratuity goes to legal heirs as default.
Source: Cleartax
They are only eligible nominees who are members of the family (spouse, children, dependent parents, etc.), and more than one nominee can be nominated.
Employers have to accept nominations within 30 days, and employees can amend them by submitting Form G or H with two witnesses.
Source: Business Standard
On retirement or superannuation.
On resignation, after 5 years of service.
On the death of an employee, irrespective of tenure.
If gratuity is unpaid:
File a formal grievance with your employer or HR.
File a written application to the Controlling Authority.
If not resolved within the timeframes stipulated, appeal to the Appellate Authority.
The authority can call for authorities, audit records, and compel payment within 30 days of the order.
Such a mechanism provides legal redress and ensures compliance with legislatively imposed obligations.
Gratuity is determined by the formula:
Gratuity = (Last drawn salary × 15/26 × Number of years of completed service) (livemint.com).
In the case of employees who are covered under the Act, the gratuity is calculated at the basic + dearness allowance (last drawn) divided by 26, multiplied by 15 days and years of service. Indicatively, 8 years of service in a basic salary of 50,000 a month translates to:
($50,000/26) 15 8 = 2,30,769.
When the final year surpasses 6 months, this is regarded as a full year. The gratitude must be paid out of the funds of the employer or through an insurer-based group scheme. The highest amount that can be paid under the Act is 20 lakh; anything more is to be considered taxable.
Source: Livemint
In the case of employees not covered under the Act (e.g., small establishments or in cases of central/state employment):
Salary of half-month × time in service, with the salary being the mean average of the last ten months' wages.
Such an amount is liable to the 20 lakhs limit of tax-free exemption, statutory pre-conditions of death/ disability exclusions.
Integration of the calculation:
Calculate the average salary in the last ten months.
Convert by a factor of 0.5, and next by the complete years.
Any gratuity above the exemption level is to be added to the taxable income.
Source: Livemint
Gratuity is tax-exempt up to specified limits under the Income Tax Act, with distinct thresholds based on employment type:
Employee Type | Exemption Limit |
Covered under the Gratuity Act | Lowest of: actual gratuity OR ₹20 lakh OR 15 days’ pay/year × years worked divided by 26. |
Not covered under the Act | Lowest of: actual gratuity OR ₹20 lakh OR ½ month’s salary/year × years of service averaged over 10 months |
Government employees | Fully exempt |
Death/disability gratuity payments | Same exemption limits without the service length requirement |
Above-threshold levels are taxed as salary income.
Employers have to report gratuity components while submitting Form 16.
The provisions ensure compliance and tax planning for both employers and employees.
Source: Livemint
Termination on account of willful negligence, violence, or morally culpable acts while in service can result in loss of gratuity.
Source: Economic Times
The Act provides for a maximum gratuity payment of ₹20 lakh (or employer's prevailing terms, if more favourable), which goes beyond taxable excess portions.
The recent Gratuity Rules are as follows:
The government has been given the power to modify the ₹20 lakh limit to account for inflation and wage hikes.
Ongoing debate on reducing the five-year eligibility period to enhance access for employees with lesser tenures.
Source: Livemint
India Gratuity is an essential statutory benefit that protects employees by granting a lump-sum payment on retirement, resignation, death, or disability after a set number of years of continuous service. It is governed under the Payment of Gratuity Act, 1972, and applies to companies employing 10 or more employees, and eligibility for entitlement is usually after a continuous five years of employment, which is not subject to exemption in the event of death or disability. The appointing process with Form F makes sure that beneficiaries are positioned in the right hands, and there are legal systems in case payment is late. It is easy to calculate as 15 days of salary in a year with a maximum limit of 20 lakh and a predetermined structure of tax exemption. The amendments seek to improve the legislation by giving the government the power to increase the cap and look to relax eligibility standards. In general, gratitude ensures a financial safety net for workers and discourages early job separation, enabling organisations to strengthen their retention and durability as well as adhere to regulatory requirements.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities.
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Yes, a nominee can be appointed by employees through Form F in order to receive gratuity in case of death from a family member.
Yes, if the contractual employee is on the company payroll and has 5 continuous years of service, they qualify under the Gratuity Act.
5 years of continuous service is usually required. This requirement is, however, exempted in case of death or disability.
No, gratuity cannot be denied to the employee if he/she fulfills eligibility conditions, unless terminated for misconduct.
Gratuity is payable on resignation, retirement, superannuation, or even death/disability, based on eligibility.
Yes, nomination is permissible and must be made within one year of service so that the benefit accrues to the intended person.
Yes, if you are a contract worker under the direct supervision of the principal employer and fulfil the service requirements, you qualify.
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