Gratuity is a key financial benefit that rewards employees for their loyalty and consistent service. It provides a lump sum from the employer as a gesture of appreciation when employment ends because of retirement, resignation, or other eligible circumstances.
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The Payment of Gratuity Act, 1972, defines this right and makes it compulsory for qualifying organizations to pay eligible employees. Many salaried individuals remain unsure about the exact Gratuity Eligibility rules, especially before and after completing five years of service. Understanding these provisions helps you secure what you rightfully deserve and plan your long-term financial goals better.
Gratuity is a part of the broader gratuity provision made by employers under the Indian labour law. It is not a voluntary benefit but a legal obligation once certain service conditions are fulfilled. Employers pay gratuity to thank employees for their years of contribution and to support them during their transition into a new phase of life.
The amount becomes payable after employment ends through retirement, resignation, disability, or, in unfortunate circumstances, death. It forms a crucial part of your overall compensation and contributes significantly to your financial security, especially when you integrate it with a retirement plan to build a stronger post-retirement corpus.
The Payment of Gratuity Act, 1972, covers organizations that employ ten or more people. Once covered, the Act continues to apply even if the number of employees falls below ten. Both government and private sector employees are entitled to receive gratuity if they meet the gratuity eligibility criteria.
The Act defines several key aspects, such as continuous service, calculation methods, and payment timelines. It also ensures that employees who have served with commitment receive a fair payout without delay or unnecessary deductions.
Under normal conditions, an employee qualifies for gratuity after completing five continuous years of service with the same employer. The gratuity minimum years requirement ensures that the benefit rewards long-term service rather than short-term employment.
Continuous service includes all approved leaves, maternity breaks, or periods of absence due to illness or accident. It does not break even during strikes or lockouts unless the employee resigns voluntarily.
Employers calculate gratuity based on the last drawn salary, which includes the basic pay and dearness allowance, multiplied by the number of completed years of service and divided by 26, representing working days in a month.
The five-year condition does not apply in certain cases where the employment ends due to unavoidable reasons. Employees or their families can claim gratuity even before completing five years if:
In such circumstances, the gratuity amount becomes payable immediately to the employee or nominee. Employers must process the payment within 30 days of the event.
Continuous service is the cornerstone of Gratuity Eligibility. It refers to uninterrupted employment, including periods when an employee was not physically at work but remained officially on the rolls.
For establishments with a six-day workweek, employees who have worked at least 240 days in a year are considered to have completed one full year of service. In seasonal organizations, 190 working days make up a year.
Indian courts have also ruled that employees completing four years and 240 days can be considered eligible for gratuity. This interpretation protects workers who fall slightly short of the five-year mark due to technical reasons.
For employees covered under the Act, the standard formula is:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) ÷ 26
Where:
Example:
If an employee’s last drawn salary is ₹50,000 and they have served for 8 years:
Gratuity = (50,000 × 15 × 8) ÷ 26 = ₹2,30,769
Such clarity helps employees verify their payout and ensures employers adhere to the correct calculation method. The total received amount can be strategically invested in a retirement planning calculator to estimate future growth and optimize tax savings.
Once you cross the five-year mark, gratuity becomes a guaranteed right. The amount continues to grow with every additional year of service and salary revision. A longer tenure directly improves your payout since the formula is multiplied by the years completed.
Employees who stay with one organization for a decade or more enjoy substantially higher gratuity benefits, making it a meaningful financial cushion during job changes or retirement.
Under current rules, the maximum tax-free gratuity limit is ₹20 lakh. This ceiling applies to both private and public-sector employees. Any amount received beyond this limit becomes taxable according to your income slab.
The government periodically reviews this threshold, keeping inflation and wage growth in mind. For employees with multiple employments during their career, the total tax exemption across all employers cannot exceed ₹20 lakh. The rule safeguards both fairness and consistency under the Income Tax Act.
Gratuity payments enjoy favourable tax treatment under Section 10(10) of the Income Tax Act. The exemption depends on the type of employment:
1. Government Employees
The entire gratuity amount is tax-free without any monetary cap.
2. Employees Covered Under the Act
The tax-free amount is the least of:
3. Employees Not Covered Under the Act
Tax exemption equals the least of:
Planning how to use this tax-free component efficiently can make a noticeable difference in your post-service savings.
The gratuity framework has seen a few notable updates in recent years:
These changes make gratuity more inclusive and responsive to the evolving employment landscape in India.
To claim gratuity, employees must submit Form I to their employer within 30 days of retirement, resignation, or termination. Employers are legally required to release payment within 30 days of receiving the claim.
If payment is delayed, the employer must pay interest for the delay period. Disputes can be raised with the Controlling Authority under the Act for resolution.
Prompt submission ensures timely credit of your dues, which you can further utilize in a retirement annuity plan to secure a steady income during retirement years.
Employees should be aware of these distinctions to understand how tenure influences their entitlement.
| Criteria | Before 5 Years | After 5 Years |
|---|---|---|
| Eligibility | Applicable in cases of death, disability, or fixed-term employment | Mandatory for all employees completing 5 years |
| Payment Recipient | Employee or nominee | Employee only |
| Tax Status | Same as regular gratuity | Tax benefits under Section 10(10) apply |
| Continuity of Service | Not required under exceptions | Required for eligibility |
Several misconceptions still circulate around gratuity. A few of the most common include:
Clarifying these points helps employees assert their legal rights confidently.
Gratuity is more than a legal entitlement; it is an essential pillar of your long-term financial stability. It complements your retirement savings and helps reduce financial stress after leaving employment.
Strategic planning, combined with the disciplined use of tools like a retirement plan, ensures your gratuity serves as a reliable income buffer in later years. By calculating your expected gratuity early and aligning it with your other retirement goals, you can enjoy a smoother transition from active income to financial independence.
Understanding Gratuity Eligibilityis vital for every salaried professional. Knowing when you qualify, how much you can expect, and what exceptions apply prevents loss of rightful benefits.
The 5-year rule is an important milestone, but employees should also be aware of the scenarios that allow earlier claims. With correct calculation, timely filing, and a clear grasp of tax implications, gratuity can become one of the most valuable components of your post-employment corpus.
Use your gratuity wisely, pair it with a reliable pension or insurance-based retirement product, and take a step closer to a stable and fulfilling future.
Plan your post-retirement income with confidence. Choose a retirement annuity plan from PNB MetLife and enjoy a regular income stream throughout your retirement.
In India, gratuity eligibility applies to employees who complete five years of continuous service, while those who leave earlier qualify only in cases of death or permanent disability.
Yes, the Supreme Court has upheld that an employee completing four years and 240 days of continuous service is considered to have completed five years for the purpose of gratuity eligibility.
The old rule of gratuity required employees to complete a minimum of five years of continuous service, with any service beyond six months counted as a full year for eligibility after 5 years.
If an employee dies before completing five years, the gratuity eligibility rule is waived, and the gratuity is paid to the nominee or legal heir regardless of service duration.
Piyush Kataria, SEO Manager at PNB MetLife, is a seasoned digital marketing strategist with over a decade of experience in optimizing websites for search engines. His expertise extends to keyword research, content strategy, technical SEO, and link building, all of which have been instrumental in driving organic traffic growth at PNB MetLife. With a strong foundation in life insurance, Piyush leverages his industry knowledge to create targeted and effective SEO campaigns.
Sakshi Malhotra is a seasoned marketing professional associated with the Life Insurance industry since 2007. At PNB MetLife, she heads Digital Marketing and Direct to Customer line of business. She is responsible for driving effective customer engagement through the company’s website and social media channels. In addition, she drives customer online buying journeys to help them buy the right product.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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