Gratuity in India: Eligibility, Calculation, Rules & Examples
Introduction
Gratuity is an important employee benefit that is paid by an employer to an eligible employee as a form of financial benefit for the service rendered.
For HR professionals, understanding gratuity is important because eligibility, calculation, wage components, service period and the employee's reason for leaving can all affect the final gratuity amount.
This guide explains gratuity eligibility, calculation, formula, fixed-term employment, payment rules and practical examples in simple language.
Key Takeaways
- Gratuity is a statutory benefit payable to eligible employees subject to applicable conditions.
- For regular employees, the general qualifying service requirement is five years, subject to statutory exceptions.
- Fixed-Term Employees have specific gratuity provisions under the current framework.
- The standard gratuity calculation is based on 15 days' wages for every completed year of service, as per the applicable provisions.
- Gratuity should be calculated using the applicable statutory definition of wages, not simply gross salary or CTC.
- Service exceeding six months is generally counted as an additional year for gratuity calculation, subject to the applicable statutory provisions.
- Gratuity and Full & Final Settlement are related but are not the same thing.
- HR should always verify the current applicable law, rules and notifications before processing gratuity.
Table of Contents
- Introduction
- Key Takeaways
- What is Gratuity?
- Who is Eligible for Gratuity?
- Gratuity Calculation Formula
- How is the Service Period Counted?
- Gratuity Calculation Example
- Which Salary Components are Considered?
- Is Gratuity Applicable During Probation?
- What About Fixed-Term Employees?
- What Happens When an Employee Resigns?
- Is Gratuity Payable on Termination?
- Is Gratuity Payable on Death?
- Is Gratuity Payable to Contract Labour?
- What is the Maximum Gratuity Amount?
- When Should Gratuity be Paid?
- Common HR Mistakes in Gratuity Calculation
- Quick Gratuity Checklist for HR
- Gratuity vs Full & Final Settlement
- Frequently Asked Questions
- Conclusion
- Ministry of Labour & Employment, Government of India — Code on Social Security, 2020 and Labour Code FAQs
- Ministry of Labour & Employment, Government of India — Code on Social Security, 2020
- Ministry of Labour & Employment, Government of India — FAQs on Labour Codes
- India Code — Code on Social Security, 2020
What is Gratuity?
Gratuity is a statutory benefit payable by an employer to an eligible employee after the employee completes the required period of service, subject to the applicable provisions.
The gratuity framework is now covered under the Code on Social Security, 2020, which came into force from 21 November 2025.
Gratuity is generally associated with long-term service and is normally paid when employment ends due to:
• Resignation
• Retirement
• Superannuation
• Termination
• Death or disablement, subject to the applicable provisions
Who is Eligible for Gratuity?
For regular employees, gratuity is generally linked to completion of the prescribed period of continuous service.
Under Section 53 of the Code on Social Security, gratuity is generally payable after completion of five years of continuous service, subject to applicable statutory exceptions.
However, there are important exceptions.
Exceptions to the Five-Year Requirement
The five-year requirement does not apply in the same way in cases such as:
• Death of the employee
• Disablement
• Fixed-term employment, where the applicable conditions are satisfied
For a Fixed-Term Employee (FTE), the Ministry's current FAQ clarifies that gratuity is payable when the employee renders service under the contract for one year from the start of the contract.
A Fixed-Term Employee must be directly engaged by the employer. Contract labour engaged through a contractor is not treated as a Fixed-Term Employee for this purpose.
Gratuity Calculation Formula
For an employee covered by the standard gratuity calculation:
Gratuity = Last Drawn Wages × 15/26 × Completed Years of Service
Where:
• Last Drawn Wages = wages considered for gratuity calculation under the applicable law
• 15 = 15 days' wages
• 26 = assumed working days in a month for this calculation
• Completed Years of Service = completed years, with the applicable rounding rule
The Code provides gratuity at the rate of 15 days' wages for every completed year of service, subject to the applicable provisions.
For fixed-term employees and employees who die while in service, gratuity is payable on a pro-rata basis as specified under the applicable provisions.
How is the Service Period Counted?
For the standard calculation, a year of service is considered according to the statutory rounding provision.
A period of service involving more than six months beyond completed years is generally counted as an additional year for gratuity calculation.
Example
Suppose an employee has completed:
7 years and 7 months
For calculation purposes, this would generally
be considered as:
8 years
Whereas:
7 years and 4 months
would generally be considered as:
7 years
HR should always verify the applicable statutory provisions while processing the final settlement.
Gratuity Calculation Example
Suppose:
Last drawn wages considered for gratuity = ₹40,000
Completed service = 8 years
Using the formula:
Gratuity = ₹40,000 × 15/26 × 8
Gratuity = ₹1,84,615 approximately
Therefore, the estimated gratuity would be:
₹1,84,615
The actual amount should be calculated using the wages legally applicable to the employee's case.
Which Salary Components are Considered?
One of the most important HR questions is:
"Should gratuity be calculated on basic salary or gross salary?"
The answer is not simply "gross salary."
The applicable definition of wages under the Code on Social Security has to be considered.
The Ministry's 2026 FAQ specifically clarifies that payments which are not part of the components covered by the statutory definition of wages are not considered for gratuity calculation.
Therefore, HR should not automatically use:
CTC = Gratuity Wage
or
Gross Salary = Gratuity Wage
Instead, the applicable wage definition should be examined before calculating gratuity.
Is Gratuity Applicable During Probation?
This is a common HR question.
Probation itself does not create a separate gratuity formula.
What matters is the employee's service and whether the employee falls within the applicable statutory coverage and eligibility requirements.
For a regular employee, the general qualifying service requirement remains important.
Therefore, HR should consider the employee's actual qualifying continuous service, rather than simply treating probation as a period that is automatically excluded.
What About Fixed-Term Employees?
This is one of the important changes HR professionals should know.
Under the current Labour Code framework, a Fixed-Term Employee (FTE) can become eligible for gratuity after rendering service under the contract for one year.
The Ministry has specifically clarified that the one-year period is counted from the start of the contract.
Example
An employee is directly hired on a fixed-term contract for two years.
If the employee completes one year of service under the contract, the employee can become eligible for gratuity according to the applicable provisions.
This is different from the general five-year qualifying requirement applicable to regular employees.
What Happens When an Employee Resigns?
If an eligible regular employee resigns after completing the required qualifying service, gratuity may become payable.
For example:
Employee joins: 1 January 2020
Employee resigns: 31 January 2026
If the employee satisfies the applicable eligibility and continuous-service requirements, gratuity can become payable.
The final calculation should be based on the employee's applicable last drawn wages and qualifying service.
Is Gratuity Payable on Termination?
Yes, gratuity can become payable when employment is terminated, provided the employee meets the applicable eligibility conditions.
However, the circumstances of termination can affect whether gratuity is payable or whether it can be forfeited under the statutory provisions.
Therefore, HR should not process gratuity solely based on the word "termination."
The reason and circumstances of termination must be checked against the applicable law.
Is Gratuity Payable on Death?
Yes.
In the case of the death of an employee, the usual five-year service requirement does not apply in the same manner.
The gratuity becomes payable according to the applicable statutory provisions to the nominee or eligible recipient.
This is an important exception HR teams should remember.
Is Gratuity Payable to Contract Labour?
Contract labour needs to be distinguished from a directly employed fixed-term employee.
The Ministry's 2026 FAQ clarifies that for contract labour, the contractor is the employer responsible for gratuity, subject to the applicable conditions, including the five-year continuous-service requirement.
Therefore:
Fixed-Term Employee ≠ Contract Labour
These two categories should not be treated as the same for gratuity purposes.
What is the Maximum Gratuity Amount?
The maximum gratuity amount is prescribed by the Central Government.
The Ministry's FAQ currently states the maximum gratuity as:
₹20 lakh
The current maximum gratuity ceiling is ₹20 lakh. However, HR should verify the latest government notification because the ceiling can be revised.
When Should Gratuity be Paid? ?
Once gratuity becomes payable, the employer is required to follow the statutory process and timeline for determining and paying the amount.
The employer is required to pay the gratuity amount within 30 days from the date it becomes payable, subject to the applicable statutory provisions.
HR should ensure that gratuity is included in the employee's exit process and that the required documentation is completed properly.
A delay in payment may result in interest or other consequences as provided under the applicable law.
Common HR Mistakes in Gratuity Calculation
Here are some common mistakes HR teams should avoid:
1. Using Gross Salary Directly
Gross salary should not automatically be treated as gratuity wages.
2. Ignoring the Wage Definition
The statutory definition of wages should be checked before calculation.
3. Applying the Five-Year Rule to Everyone
Fixed-term employees and certain other cases have specific provisions.
4. Treating Fixed-Term Employees and Contract Labour as the Same
They are different employment categories and should be assessed separately.
5. Forgetting Service Rounding Rules
The applicable rule regarding service exceeding six months should be considered.
6. Using Old Gratuity Rules Without Checking the Current Framework
The Labour Codes have changed the legal framework, so HR professionals should verify the current provisions before processing gratuity.
Quick Gratuity Checklist for HR
Before processing gratuity, HR should check:
☑ Employee category
☑ Date of joining
☑ Date of exit
☑ Reason for separation
☑ Continuous service
☑ Last drawn applicable wages
☑ Applicable gratuity formula
☑ Whether the employee is fixed-term
☑ Whether any special exception applies
☑ Applicable maximum ceiling
☑ Required documentation
☑ Payment timeline
Gratuity vs Full & Final Settlement
Gratuity and Full & Final Settlement (F&F) are not the same thing.
F&F settlement may include several employee dues such as:
• Salary payable
• Leave encashment, where applicable
• Incentives or variable pay, where applicable
• Reimbursements
• Statutory or contractual dues
• Gratuity, where payable
Therefore, gratuity may be one component of an employee's overall exit settlement.
Frequently Asked Questions
1. Is gratuity applicable after 5 years?
For regular employees, five years of continuous service is generally the qualifying requirement, subject to statutory exceptions.
2. Is gratuity available after one year?
For a regular employee, completing one year does not generally replace the five-year qualifying requirement.
However, Fixed-Term Employees have a specific provision under the current framework and can become eligible after one year of service under the contract.
3. Is gratuity calculated on basic salary?
Not necessarily. The applicable statutory definition of wages must be used.
4. Is gratuity part of CTC?
An employer may show gratuity as a component of CTC, but CTC presentation and actual statutory gratuity liability are separate concepts.
5. Can gratuity be forfeited?
In specified circumstances, gratuity can be forfeited under the applicable statutory provisions. Such cases should be reviewed carefully before making a decision.
6. Is gratuity taxable?
Tax treatment depends on the employee's circumstances and the applicable provisions of the Income-tax law. Employees should check the current tax rules applicable to their case.
Conclusion
Gratuity is more than just a simple “5 years = gratuity” rule.
For HR professionals, determining gratuity requires looking at multiple factors, including:
Employee category + qualifying service + applicable wages + reason for separation + current statutory provisions
With the implementation of the Labour Codes, it is especially important for HR teams to understand the specific provisions applicable to Fixed-Term Employees and the updated definition of wages.
For accurate payroll and Full & Final (F&F) processing, gratuity should always be calculated based on the current applicable laws, rules and notifications.
Disclaimer
This article is intended for general HR learning and educational purposes only. Labour-law provisions, rules, notifications and tax treatment may change from time to time. For an actual employee case, HR and payroll teams should verify the latest applicable provisions and seek professional or legal advice where required.
Key Source
These government sources confirm the current gratuity framework, including the 21 November 2025 implementation date.
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