BAJAJ BROKING
August 14, 2025
4 mins read
Gratuity is a payment made by an employer to an employee as a token of appreciation for the service rendered over time. It is given when an employee retires, resigns, or completes a minimum period of service. This amount is regulated by Indian law and helps provide financial support after leaving the job. The gratuity payment is based on the last drawn salary and years of service. It encourages employee loyalty and ensures that workers receive a fair benefit upon their service ending. Understanding how gratuity works is important for both employees and employers.
The Gratuity Act, 1972, is a law passed by the Indian government to protect employees’ rights to receive gratuity. It applies to companies with 10 or more employees. The Act states that an employee becomes eligible for gratuity after completing at least 5 years of continuous service with the same employer. The years of service and the recent salary are used to determine the gratuity amount. This law clearly outlines the procedure and guarantees prompt payment. It protects employees from delays or denial of gratuity payments. Employers must follow the rules under this Act to avoid penalties.
Gratuity is a payment given by an employer to an employee when their service ends due to retirement, resignation after completing at least five years, or death. The amount is calculated based on the employee’s last drawn salary and total years of service. Employers are required to pay the gratuity within 30 days of leaving. If delayed, interest may be charged on the unpaid amount as per the law.
Gratuity is a part of the overall salary structure but is not paid as a monthly wage. Instead, it is given as a lump sum amount when an employee leaves the company after completing the required service period. The calculation is based on the last drawn salary, usually including the basic pay and dearness allowance. Although separate from regular salary, gratuity is an important component of total employee benefits.
Employees qualify for gratuity if they meet these criteria:
Minimum 5 years of continuous service with the employer
The employer must have 10 or more employees.
The employee should have retired, resigned, died, or been terminated.
Service can be with the same company or its subsidiary.
Part-time or contract workers are usually not eligible unless specified by employer policy
The gratuity formula is:
Gratuity = (Last drawn salary × 15/26) × Number of years of service
This means 15 days’ wages are paid for every completed year, with 26 as the working days in a month.
Find the employee’s last drawn monthly salary, including basic pay and dearness allowance.
Multiply the last drawn salary by 15, then divide by 26 (working days in a month).
Calculate the total number of completed years of continuous service.
Multiply the result from Step 2 by the number of completed years of service.
Include gratuity for any part of the year if service exceeds a full year.
For employees covered under the Gratuity Act, 1972, the calculation follows the legal formula. The employer is responsible for paying this amount when the employee retires, resigns after 5 years, or dies. The payment must be made promptly to avoid penalties. This ensures employees receive their due benefits as a legal right. The Act protects workers from unfair practices and delayed payments. Employers are required to maintain records and pay gratuity within 30 days of service termination. If payment is delayed, interest may be added as per law.
Employees working in organisations with fewer than 10 employees or in unregulated sectors may not be covered by the Act. For them, gratuity depends on the company’s policies or agreements. However, many companies voluntarily offer gratuity benefits to retain employees and comply with general labour laws.
In case of an employee’s death, the nominee is entitled to receive gratuity. The calculation uses the last drawn salary and counts the service period, including 6 months extra, as one full year. The formula is:
Particulars | Calculation |
Last drawn salary | Basic + Dearness Allowance |
Service period | Completed years + 6 months counted as 1 year |
Gratuity amount | (Last salary × 15/26) × service years |
This ensures financial support for the family after the employee’s death.
Gratuity offers financial stability to employees after years of service. It serves as a reward for loyalty and helps with post-employment needs such as retirement or unexpected expenses.
Below are the key benefits:
Gratuity ensures monetary support after retirement or job exit.
It motivates employees to stay longer with the organisation.
Employees are entitled to gratuity under law, ensuring fair treatment.
In case of death, the nominee receives gratuity, helping the family cope financially.
Receiving gratuity builds trust and satisfaction among employees.
The maximum gratuity payable under the Payment of Gratuity Act, 1972 is ₹20 lakh. This limit applies to both private and government sector employees covered under the Act. Even if an employee’s calculated gratuity exceeds this amount, the employer is legally required to pay only up to ₹20 lakh. Any payment beyond this cap is at the employer’s discretion and is not mandated by law.
Gratuity payments are subject to income tax based on the employee's category and the amount received. Understanding the tax treatment helps in proper financial planning and compliance with tax laws. While a portion of gratuity is tax-exempt, the excess may attract taxation.
Gratuity up to ₹20 lakh is exempt from income tax for private sector employees covered under the Gratuity Act.
The entire gratuity amount is fully exempt from tax for central and state government employees.
Any gratuity amount received above the exemption limit is taxable as income under the head “Salaries.”
Gratuity nomination is a vital step to ensure that the rightful person receives the benefit in case of the employee’s death. Without a valid nomination, the payment may be delayed due to legal formalities or disputes among family members. It offers clarity and protection for both the employer and the nominee.
A valid nomination speeds up the gratuity disbursal process.
Prevents conflicts among legal heirs or dependents.
Employers must accept written nominations and keep them on record.
Employees can change nominees anytime during service.
The Gratuity Act, 1972, outlines the gratuity rules that both employers and employees must follow. These rules ensure fair treatment and timely payment. Employers must comply with these provisions to avoid penalties, and employees should understand the gratuity rule to claim their rights smoothly.
Employees must complete 5 years of continuous service to qualify.
Applies to companies with 10 or more employees at any time in the past 12 months.
Gratuity must be paid within 30 days of resignation, retirement, or death.
Delayed payments attract 10% annual interest.
The Payment of Gratuity Act, 1972, sets clear timelines for disbursing gratuity to eligible employees. Employers are legally obligated to follow the schedule to avoid penalties and ensure timely payouts. Delays in payment attract interest, making adherence to deadlines essential.
Employers must pay gratuity within 30 days from the employee’s termination, retirement, or death.
If not paid within 30 days, 10% annual interest is applicable on the delayed amount.
Employers should notify the payable amount in writing and maintain proper gratuity records for transparency and compliance.
Gratuity is a key employee benefit providing financial support after service ends. It is governed by the Gratuity Act, 1972, and applies to the majority of employees in India. Understanding eligibility, calculation, and payment rules helps employees know their rights. Employers must follow legal guidelines to pay gratuity on time and maintain proper records. Nomination is important to ensure the rightful person receives the payment in case of death. This benefit motivates employees to serve longer and provides financial security for their future.
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Contract workers are generally not eligible for gratuity under the law unless they have worked continuously for five years or more. Eligibility depends on the employer’s policy and the nature of the contract. Many contract workers do not receive gratuity benefits.
Gratuity up to ₹20 lakh is exempt from income tax for the majority of employees. If the amount exceeds this limit, the excess is taxable as per income tax laws. Employees should report the gratuity amount received while filing their tax returns.
Employers are required to pay gratuity within 30 days from the date the employee leaves the company. If payment is delayed beyond this period, the employer must pay interest on the overdue amount as per the Gratuity Act.
Yes, gratuity is a legal entitlement. Even if the employer faces bankruptcy, employees can claim gratuity through legal channels or government schemes designed to protect such payments.
Yes, the law caps the maximum gratuity payment at ₹20 lakh. This applies to all employees covered under the Gratuity Act and protects employers while ensuring employees receive a fair benefit.
Employees must submit a nomination form to their employer, naming the person who should receive their gratuity after their death. This nomination can be updated anytime to ensure the correct beneficiary receives the payment.
Gratuity can only be withdrawn after retirement, resignation after five years of service, or death. Early withdrawal of gratuity is generally not permitted under the law or company policy.
Yes, for companies with 10 or more employees, paying gratuity to eligible employees is compulsory under the Indian Gratuity Act. This ensures employees receive a retirement benefit after long-term service.
While gratuity is included in the total salary package (CTC), it is paid separately after the employee leaves the job. It is not part of monthly salary payments but is considered in overall compensation.
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