After years with one employer, Indian law requires a parting gift: gratuity, a lump sum paid as a token of appreciation for long service. Governed by the Payment of Gratuity Act, 1972, it applies to establishments with ten or more employees and accrues quietly in the background – roughly half a month’s salary for every year you work. Many employees first hear of it when resigning after five years, and many discover too late that switching jobs at four years and eleven months forfeits the entire amount. Here is how gratuity works, how it is calculated, and how it is taxed.

Eligibility: the five-year rule and its exceptions

The headline rule: you become eligible after five years of continuous service with the same employer. Continuous service has a precise meaning – you must have worked at least 240 days in each year (190 days for those working below ground in mines). Leave, including maternity leave up to the statutory limit, counts toward continuity; unauthorised long absences can break it. The five-year rule has two major exceptions: on death or disablement due to accident or disease, gratuity is payable regardless of service length, calculated on the completed years. Note the cliff edge: resigning at four years and ten months earns nothing, while five years earns the full amount – timing your exit matters enormously. Service across group companies may or may not combine, depending on the employment structure, so clarify before assuming.

The formula: 15 days’ salary per year

The statutory formula is: (Last drawn basic salary + dearness allowance) x 15/26 x number of completed years of service. The 15/26 fraction represents 15 days out of 26 working days a month. Only basic plus DA count – HRA, bonuses and allowances are excluded, which is why a high basic salary directly increases gratuity. For fractions of a year, service beyond six months in the final year rounds up to a full year: 5 years and 7 months counts as 6 years. Example: with a last-drawn basic plus DA of 60,000 rupees and 6 years of service, gratuity equals 60,000 x 15/26 x 6, or about 2.08 lakh rupees. Employers may pay more than the statutory minimum – many do as a goodwill gesture – but cannot pay less.

Tax treatment: the exemption limits

For government employees, gratuity is fully tax-exempt. For private-sector employees covered by the Act, the least of three amounts is exempt: the actual gratuity received, 20 lakh rupees (the statutory ceiling, raised from 10 lakh in 2018), or the formula amount of 15 days’ salary per completed year. Any amount above the exempt portion is taxed as salary income. Employees of employers not covered by the Act get a similar exemption computed slightly differently, also capped at 20 lakh rupees. Importantly, the 20-lakh lifetime ceiling applies across all employers combined – gratuity received from a previous employer counts toward the limit. Plan job switches accordingly: the exemption is generous, but it is not unlimited.

Nominations, payment timelines and disputes

Nominate a beneficiary for your gratuity in the company’s records – without a nomination, your family faces paperwork delays. On becoming payable (resignation, retirement, termination), the employer must pay within 30 days; delays attract simple interest. If the employer disputes or withholds gratuity, the controlling authority appointed under the Act – usually the Assistant Labour Commissioner – adjudicates claims, and appeals lie with higher authorities. Gratuity cannot be forfeited except where the employee’s services were terminated for riotous or disorderly conduct, or for an offence involving moral turpitude – ordinary resignation or retrenchment never forfeits it. Keep your relieving letters and service records; they are the proof of your years if records go missing.

FAQs

Does gratuity apply if my company has fewer than 10 employees?

The Act applies to establishments with 10 or more employees. Smaller employers may still pay gratuity voluntarily, and some states extend coverage – but the statutory right attaches at the 10-employee threshold.

Is the 20-lakh exemption per employer or lifetime?

Lifetime, across all employers combined. Track gratuity received from previous jobs when computing tax on a new payout.

What if I am fired before five years?

No gratuity is payable, except that termination for misconduct involving moral turpitude can forfeit even vested gratuity. Retrenchment after five years, however, still earns it.

Compiled by the Khabar 24h Editorial Desk from publicly available sources.