Quick answer: Gratuity is a lump sum an employer pays when employment ends, as a reward for long service. Since 21 November 2025 it is governed by Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. A permanent employee qualifies after 5 years of continuous service, a fixed-term employee after 1 year, and there is no minimum on death or disablement. It is 15 days' wages for each year of service, capped at ₹20 lakh, paid by the employer within 30 days.
Gratuity is the one statutory benefit you never see on a monthly payslip, yet it can be the largest single payment you receive from an employer. This guide is the hub for everything gratuity on HR Calcy: what gratuity is, who is covered and who pays, eligibility and the exceptions, how it is worked out in brief, nomination, the claim process and forms under the 2026 Central Rules, forfeiture, disputes, and tax. Each topic links to a detailed guide where one exists, and the gratuity calculator does the arithmetic.
What is gratuity?
Gratuity is a statutory retirement and exit benefit: a one-time payment from the employer to an employee who leaves after the qualifying period of service, or to the nominee or legal heirs if the employee dies. It rewards length of service, which is why it grows with each year worked and is based on the wages at the time of leaving.
The law on gratuity moved on 21 November 2025 from the Payment of Gratuity Act, 1972 to Chapter V (sections 53 to 58) of the Code on Social Security, 2020. The core rules carried over: five years' continuous service, 15 days' wages a year, the ₹20 lakh ceiling and the grounds for forfeiture. The main changes are the one-year rule for fixed-term employees, the Labour Codes' wider definition of wages, and new forms under the Social Security (Central) Rules, 2026.
What is gratuity in my salary?
Gratuity is not part of your monthly gross pay and is not deducted from it. It is paid only when you leave. Many employers show an estimated gratuity cost as a line in your CTC, so that the package reflects what they expect to spend on you; that line is usually about 4.81% of wages (as defined in the Labour Codes; many employers still use basic). Gratuity does not have to be shown in your salary or CTC at all: what is mandatory is paying it at exit to eligible employees of covered establishments. Our guide to CTC explains why CTC is higher than gross, and the gratuity and CTC guide covers how employers show it.
What is 4.81% in gratuity?
It is the yearly cost of gratuity expressed as a percentage of a year's wages: one year of service earns 15/26 of a month's wages, and dividing that by 12 months gives 15 ÷ 26 ÷ 12 = 4.81%. So on monthly wages of ₹30,000, the employer budgets about ₹1,442 a month (₹17,308 a year) for gratuity. That is a cost estimate for budgeting, not money set aside in your name; what you actually receive depends on your service and last drawn wages when you leave.
Which employers must pay gratuity?
Gratuity under the Code applies to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment in which 10 or more employees are employed, or were employed on any day of the preceding 12 months. Once an establishment is covered, it stays covered even if the headcount later falls below 10.
The employer pays the whole amount; employees contribute nothing. Many employers fund the liability through a group gratuity scheme with an insurer, and the Code allows the government to make such insurance compulsory. An employer that is not covered, for example a shop with five staff, has no statutory duty to pay but may pay gratuity under its own policy or the employment contract.
Can we avoid gratuity?
A covered employer cannot contract out of statutory gratuity: an offer letter or policy that gives less than the law requires does not bind the employee, though an employer can always pay more. What employers can legitimately do is plan for the cost, by funding it through insurance and by understanding how the Labour Codes' wage definition raises it. Splitting service across group companies or rehiring on short contracts to break continuity is risky, because courts and authorities may treat linked engagements as continuous service, and fixed-term employees now qualify after one year anyway.
Who is eligible for gratuity?
| Situation | Minimum service |
|---|---|
| Resignation, retirement, superannuation or termination (permanent employee) | 5 years of continuous service |
| End of a fixed-term contract | 1 year of service under the contract (from 21 November 2025) |
| Death | None: paid to the nominee or legal heirs |
| Disablement due to accident or disease | None |
| Working journalists | 3 years |
Contract labour engaged through a contractor and permanent employees still need five years. Our detailed guides cover the one-year rule for fixed-term and contract employees and the court view that 4 years and 240 days can count as 5 years.
What counts as continuous service?
Under section 54 of the Code, service counts as continuous even if it was interrupted by sickness, accident, leave, absence without leave (unless the employer treated it as a break under its standing orders or rules), lay-off, strike, lock-out or a stoppage of work that was not the employee's fault. Where service in a year was not uninterrupted, the employee is still treated as having a year of continuous service if they actually worked at least 240 days in it (190 days in a mine or an establishment working fewer than six days a week).
Who is not eligible for gratuity?
- A permanent employee who leaves before five years, except on death or disablement.
- A fixed-term employee who leaves before completing one year under the contract.
- An employee of an establishment the Code does not cover, unless the employer's own policy provides for it.
- An employee whose gratuity is forfeited for the reasons explained below.
- Government employees covered by their own pension and gratuity rules, who are paid under those rules instead.
How gratuity is calculated, in brief
For an employee paid monthly, gratuity is (last drawn monthly wages ÷ 26) × 15 × completed years of service. A final part-year of more than six months counts as a full year. So ₹30,000 of wages and 5 years of service give (30,000 ÷ 26) × 15 × 5 = ₹86,538.
"Wages" now means wages as defined in the Labour Codes: basic pay, dearness allowance and retaining allowance, plus any excluded allowances above half of total pay. Because many salary structures kept basic low, this usually raises gratuity. The Labour Ministry's view, in its FAQs on the Labour Codes, is that the wider definition applies to gratuity paid on exits from 21 November 2025, on last drawn wages. The gratuity calculator works out the amount from your dates and salary, and our guide to gratuity calculation under the new Labour Codes shows what changed with worked examples.
What is the maximum gratuity?
Statutory gratuity is capped at ₹20 lakh, the limit notified under the 1972 Act, which continues under the Code according to the Labour Ministry's FAQs; the government can raise it by notification. The ₹20 lakh is a cap, not a target: you reach it only with high wages and long service. Central government employees have a separate ceiling of ₹25 lakh under their own service rules; see our guide to the 7th Pay Commission gratuity formula. Our guide to retirement gratuity covers long service and the ceiling in more depth.
Nomination for gratuity
Every employee who has completed one year of service must nominate one or more persons to receive gratuity if they die. Under rule 32 of the Social Security (Central) Rules, 2026, the nomination is made in Form III, in duplicate:
- ordinarily within 90 days of completing one year of service, or, for employees already past one year when the rules began on 8 May 2026, within 90 days of that date;
- a late nomination must still be accepted;
- the employer verifies the service details within 30 days and returns an attested copy;
- Form III is also used for a fresh nomination, made within 90 days of acquiring a family (for example after marriage), and to change an existing one.
If the employee has a family, the nomination must be in favour of one or more family members; a nomination of anyone else is invalid while a family exists. Nominating is worth doing on day one of the second year: without it, a family has to prove legal heirship, which takes longer.
How to claim gratuity: process and forms
Gratuity becomes payable when employment ends. Most employers start the process themselves in the full and final settlement, but the employee can, and should, apply in writing so the timelines run. Under rule 33 of the Central Rules:
- Apply in Form IV to the employer, ordinarily within 30 days of gratuity becoming payable; an employee can apply up to 30 days before a known retirement date. A nominee also has 30 days and a legal heir one year, and a late application must be considered if there is sufficient cause.
- Employer replies in Form V within 15 days: either a notice stating the amount and a payment date no later than 30 days from receiving the application, or a rejection with reasons, copied to the competent authority.
- Payment is made by bank transfer or demand draft; section 56 of the Code requires payment within 30 days of gratuity becoming payable. If it is paid late, the employer owes simple interest.
- If the employer refuses, pays less or does not reply, apply to the competent authority in Form VI, ordinarily within 180 days.
The competent authority, the officer appointed under section 58 of the Code (earlier called the controlling authority), hears both sides, decides the amount and directs payment; Forms VII to IX cover the hearing notice, the order and recovery. The Central Rules apply where the Central Government is the appropriate government: for example railways, major ports, mines, oilfields, air transport, telecom, banking and insurance companies, central public sector undertakings, and any establishment with branches in more than one State. Establishments in a single State fall under the State Government, whose rules and form numbers can differ, so ask your employer which forms it uses.
Gratuity is usually paid along with the rest of your exit dues; our guide to full and final settlement covers the whole settlement, and the F&F calculator adds it up.
When can gratuity be forfeited?
Section 53(6) of the Code allows forfeiture in only two situations, and both require that the employee was terminated for the conduct:
- Damage or loss: if the employee was terminated for an act, wilful omission or negligence that caused damage, loss or destruction of the employer's property, gratuity can be forfeited only to the extent of that loss.
- Serious misconduct: gratuity may be forfeited wholly or partly if the termination was for riotous or disorderly conduct or violence, or for an act amounting to an offence involving moral turpitude committed in the course of employment.
Resignation, retirement, poor performance or ordinary termination are not grounds for forfeiture, and courts have read the moral turpitude ground strictly: the act must amount to an offence, not just misconduct.
Tax on gratuity
For private-sector employees covered by the gratuity law, gratuity is tax-free up to the lowest of the amount worked out under the statutory formula, the amount actually received and ₹20 lakh, which is a lifetime limit across all employers. Under the Income-tax Act, 2025 this is allowed as a deduction under section 19 (earlier section 10(10) of the 1961 Act). Employees not covered by the gratuity law use a different formula, based on half a month's average salary for each year of service. Gratuity received by government employees is fully exempt. Any taxable part is added to salary income in the year of receipt. The retirement gratuity guide works through the tax with examples.
Gratuity rules in 2026: what is new
- New law: Chapter V of the Code on Social Security replaced the Payment of Gratuity Act from 21 November 2025.
- Fixed-term employees: gratuity after one year, for contracts ending on or after 21 November 2025.
- Wages: gratuity is worked out on wages as defined in the Labour Codes, including the 50% add-back, which raises gratuity for many employees.
- Rules and forms: the Social Security (Central) Rules, 2026, notified on 8 May 2026, replaced the Payment of Gratuity (Central) Rules, 1972, with Forms III to IX.
- Interest on late payment: section 56 requires simple interest on gratuity paid after 30 days, at a rate not above the Central Government's long-term deposit rate. A general 12% rate under section 127 was notified on 29 May 2026; whether it also applies to gratuity is not settled.
- Ceiling: unchanged at ₹20 lakh; no increase has been notified.
Related reading: Gratuity calculator · New gratuity rules 2026 · 4 years 8 months rule · Retirement gratuity · Salary structure under the new Labour Codes
Work out gratuity on Labour Code wages with confidence. The Salary Calculation Master Combo (eBook + Excel calculator) covers wages, the 50% rule, gratuity and PF with worked examples and a ready calculator.
Frequently asked questions
Is gratuity mandatory now?
Yes, for every establishment covered by Chapter V of the Code on Social Security, 2020, which includes factories, mines, oilfields, plantations, ports, railway companies and shops or establishments with 10 or more employees. An eligible employee cannot be denied statutory gratuity by contract or by a clause in the offer letter.
Can gratuity be cut from salary?
Gratuity is the employer's liability, paid from the employer's own funds when employment ends. It is not one of the deductions the Code on Wages allows from wages, so it should not appear as a deduction on your payslip. Many employers do show an estimated gratuity cost inside CTC, which is a way of presenting the package, not a deduction from your gross pay.
Will loss of pay affect gratuity?
Loss-of-pay days do not break continuous service, because leave and other absences that are not treated as a break count as uninterrupted service. They can matter when service falls short of five years and the 240-day test for the final year is applied to days actually worked. They do not reduce the amount, because gratuity is based on the rate of wages last drawn, not on the pay actually received in the last month after loss-of-pay deductions.
Who will get ₹20 lakh gratuity?
₹20 lakh is the maximum statutory gratuity, not an amount everyone receives. You reach it only when 15 days' wages for each year of service adds up to ₹20 lakh or more, for example monthly wages of about ₹1.16 lakh for 30 years. Anything an employer pays above ₹20 lakh is voluntary.
Is 4 years 7 months eligible for gratuity?
Generally no. A permanent employee needs five years of continuous service. Some High Courts have treated four years plus 240 days actually worked in the fifth year (190 in a five-day-week establishment) as five years, but seven months is too short to reach 240 days. Fixed-term employees qualify after one year, and there is no minimum on death or disablement.
Why is gratuity 15 by 26?
The law gives 15 days' wages for each completed year of service and treats a month as 26 working days, so one day's wage is monthly wages divided by 26. Fifteen such days is (monthly wages ÷ 26) × 15, about 58% of one month's wages per year of service.
Position as of 14 November 2026. Based on Chapter V of the Code on Social Security, 2020, the Social Security (Central) Rules, 2026, the Labour Ministry's FAQs on the Labour Codes and the Income-tax Act, 2025. State rules and forms apply to establishments under state governments. General information, not legal or tax advice.