Gratuity
Gratuity is a lump-sum payment an employer makes to an employee in recognition of long service. It is part of the retirement benefit under the Payment of Gratuity Act, 1972 (now under the Social Security Code). The amount is capped at ₹20 lakh.
Eligibility
Section titled “Eligibility”An employee is eligible for gratuity after five years of continuous service with the same employer. For counting service, a year is counted if the employee worked 240 days (190 for a seasonal establishment) in that year, so a partial final year can count toward the five-year mark.
The employer pays gratuity on resignation, retirement, or termination. Gratuity is not payable to an employee dismissed for misconduct, fraud, or breach of the employment agreement.
Gratuity is also due when the employer closes the establishment or retrenches the employee.
Calculation
Section titled “Calculation”The formula uses the last drawn basic pay plus dearness allowance:
Gratuity = (Last drawn basic + DA) × 15 × Years of service / 26The formula pays 15 days’ wages for each completed year of service. It is capped at ₹20 lakh. Service is rounded to the nearest full year for this purpose.
Worked example
Section titled “Worked example”An employee’s last drawn basic + DA is ₹20,000 and they served 10 years:
Gratuity = 20,000 × 15 × 10 / 26 = ₹1,15,385For a shorter or longer period:
| Last drawn basic + DA | Years of service | Gratuity |
|---|---|---|
| ₹15,000 | 6 years | ₹51,923 |
| ₹20,000 | 10 years | ₹1,15,385 |
| ₹30,000 | 15 years | ₹2,59,615 |
| ₹50,000 | 20 years | ₹5,76,923 |
Gratuity is usually paid by the employer out of its own funds. An employer can instead buy a gratuity fund or an insurance policy to cover the liability, and the premium is tax-deductible.
Nomination and claim
Section titled “Nomination and claim”Every employee must submit a nomination (Form F) naming the person to receive the gratuity. On separation, the employee (or the nominee or legal heir) applies on the prescribed form. If the employer disputes the claim, the controlling authority decides.
Under the Labour Codes
Section titled “Under the Labour Codes”The Social Security Code now governs gratuity. Under the wider definition of wages, the base for the calculation may be higher. See the Labour Codes overview.