Gratuity is a one-time payment your employer must make when you leave after five or more years of service. Under the Code on Social Security notified in November 2025, fixed-term contract workers can now claim pro-rata gratuity after just one year. Here is the formula, the updated rules, and exactly how to file your claim.

Who Is Eligible for Gratuity in India?

The Standard Rule: Five Years of Continuous Service

The Payment of Gratuity Act, 1972 applies to every establishment with ten or more employees. If you have completed five years of continuous service — and then resign, retire, are terminated, or reach superannuation — your employer is legally obligated to pay gratuity. There is no option to waive it.

The phrase “continuous service” has a practical clarification worth knowing. If you complete four years and 240 working days in the fifth year, that counts as five years completed. You do not need to wait for the calendar year to close.

• Who qualifies: Permanent employees in establishments with 10 or more workers; seasonal and piece-rate workers (calculated separately); employees transferred within the same company — service counts from the first day, not the transfer date.
• Who does not qualify: Employees in companies with fewer than 10 workers; those who have not completed five continuous years (except the exceptions below).

The Big 2025 Change: Fixed-Term Employees Now Get Gratuity After One Year

On 21 November 2025, the Government of India formally notified the four new Labour Codes, including the Code on Social Security, 2020. The key change for contract and gig workers: fixed-term employees are now eligible for pro-rata gratuity after completing just one year of service — not five.

Before this notification, a factory worker on a series of one-year contracts could work for a company for four years and receive nothing on exit. That gap has been closed. If you are on a fixed-term contract, your gratuity is calculated proportionally for the years and months you served, without the five-year threshold applying.

Death and Permanent Disability: The Five-Year Rule Drops

If an employee dies or suffers total permanent disability before completing five years, the five-year condition is entirely waived. The gratuity is paid to the registered nominee (Form F filed at onboarding) or, if no nominee exists, to the legal heir. There is no minimum service requirement in these cases.

How to Calculate Your Gratuity

The Formula

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

What counts as “Last Drawn Salary”: Basic pay plus Dearness Allowance (DA) only. HRA, travel allowance, medical reimbursement, overtime, bonus, and commission are excluded.

A Worked Example

Say you joined a company at ₹28,000 basic + ₹7,000 DA = ₹35,000 last drawn salary, and you served for six years and eight months. For gratuity purposes, six completed years applies.

Gratuity = (₹35,000 × 15 × 6) ÷ 26 = ₹1,21,154 (fully tax-free — below ₹20 lakh ceiling)

The ₹20 Lakh Ceiling and Tax Treatment

The maximum gratuity payable under the Act is ₹20 lakh. Private-sector employees have a tax-exempt limit of ₹20 lakh under Section 10(10) of the Income Tax Act. Any voluntary ex-gratia above ₹20 lakh is taxable.

How to Claim Your Gratuity Step by Step

Step 1 — Submit Form I Within 30 Days

File Form I (Application for Gratuity by an Employee) with your employer within 30 days of the date on which gratuity becomes payable. Attach: last three months’ pay slips, appointment and relieving letters, Aadhaar or PAN, and a cancelled cheque or passbook copy for NEFT transfer.

Step 2 — Wait for the Employer’s Response (15 Days)

Within 15 days of receiving your Form I, the employer must issue either Form L (Notice for Payment) or Form M (Notice Rejecting the Claim with reasons). Silence beyond 15 days is itself a violation — escalate to the Labour Commissioner.

Step 3 — Receive Payment Within 30 Days

Once gratuity becomes due, the employer has 30 days to transfer the amount via NEFT/RTGS. Delays beyond 30 days attract 10% per annum interest on the outstanding amount.

What to Do If Your Employer Refuses or Delays

File Form N (Application for Direction) with the Controlling Authority — typically the Assistant Labour Commissioner for your district — within 90 days of rejection or expiry of the 30-day window. The Controlling Authority can summon your employer and issue a legally binding recovery order for the gratuity plus interest.

The Ministry of Labour’s SAMADHAN portal (samadhan.labour.gov.in) lets you file a Claim Case online. If unsatisfied with the Controlling Authority’s order, appeal to the regional Labour Court within 60 days.

Gratuity and Women Re-Entering the Workforce

A common question on ePeople India: does a career break affect gratuity eligibility? If you left a company before five years and are returning to the workforce — after maternity leave from a different employer or a planned break — your gratuity clock resets with each new employer. Crucially, approved maternity leave counts as continuous service for gratuity purposes. You do not lose gratuity credit for time on approved leave.

Aim to negotiate your notice period carefully if you are close to a five-year milestone. And if you are evaluating an offer, check your CTC breakdown for how the employer accounts for gratuity contributions.

Frequently Asked Questions

Can I claim gratuity if I resign voluntarily after five years?

Yes. Resignation after completing five years of continuous service qualifies fully. The Payment of Gratuity Act makes no distinction between resignation and retirement.

What happens to gratuity if a company shuts down?

Gratuity claims are preferential debts in insolvency — paid before most other creditors from remaining assets. File with the Insolvency Resolution Professional if assets are insufficient.

Is gratuity calculated on basic salary or total CTC?

On basic salary plus Dearness Allowance only. HRA, travel allowance, medical reimbursement, overtime, bonus, and commission are excluded.

Can my employer forfeit my gratuity for misconduct?

Only for wilful damage to property or violence under Section 4(6) of the Payment of Gratuity Act, after a formal inquiry. Minor disciplinary lapses cannot result in forfeiture.

If I worked for two entities in the same business group, does service combine?

No. Gratuity eligibility is per legal entity. Service at separate registered companies in the same group counts independently unless there was a formal novation of contract within the same entity.

Key Takeaways

Gratuity is one of the most underestimated exit benefits in India. Employees who job-hop every two or three years lose it entirely; those who stay five-plus years walk away with a tax-free payout that funds a real transition. The formula is simple. The claim process is straightforward when you file Form I on time. And the enforcement mechanism works.

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By Sid | ePeople India — India’s workforce platform. Zero placement fees.