All about Gratuity in India

By Savithri Subramanian

Gratuity is a lump sum that a company pays as one of the many retirement benefits offered by a company to an employee.

The Payment of Gratuity Act was passed by the Parliament of India on 21st August 1972 and it came in force from 16th September 1972.


According to the Payment of Gratuity Act, 1972, an employee is eligible to receive gratuity which is not connected with any consideration and has to be considered as something given freely if he has rendered continuous service for at least five years with an organization. This gratuity is payable to the employee:

a) On employees’ superannuation or

b) On employees’ retirement or resignation

c) on his death or disablement due to accident or disease


However, when the employee does not work continuously, due to death or incapacitated, the employer is mandated by law to pay gratuity to the now ex-employer or his nominee/legal heir, as the case may be, irrespective of the number of years of continuous service.

The law further states that in case the nominee of the employee is a minor, then the assistant labour commissioner shall invest the money in nominee’s name in a term deposit with the State Bank of India or a nationalized bank for the minor’s benefit until he/she becomes a major.


  • Every factory (as defined in Factories Act), mine, oilfield, plantation, port and railway.
  • Every shop or establishment to which Shops & Establishment Act of a State applies in which 10 or more persons are employed at any time during the year end.
  • Any establishment employing 10 or more persons as may be notified by the Central Government.
  • Once Act applies, it continues to apply even if employment strength falls below 10.

Gratuity Calculation Formula

Gratuity in India is calculated using the formula:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service


  • The ratio 15/26 represents 15 days out of 26 working days in a month.
  • Last drawn salary = Basic Salary + Dearness Allowance.
  • Years of Service are rounded down to the nearest full year. For example, if the employee has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the calculation.

Payment Terms

The employer shall arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated. Gratuity should be paid in cash, or if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.

The Payment of Gratuity (Amendment) Act, 2018 enables the government to raise the limit of tax-free gratuity through an executive order by the prime minister.

  • The government had doubled the tax-free gratuity to INR 20 lakh in March 2018
  • On February 1, 2019, India’s interim budget hiked the tax-free gratuity limit from INR 20 lakh to INR 30 lakh.
Form Name Use of Form
Form A Notice of Opening
Form B Notice of Change
Form C Notice of Closure
Form F To make nomination
Form G To make fresh nomination
Form H Modification of Nomination
Form I Application for the payment of gratuity
Form J Used by the nominee to make application for payment of gratuity
Form K Used by legal heir to make application for the payment of gratuity
Form L Issued by the employer to employee stating amount and date of payment
Form M Issued by the employer stating the reason for the rejection of gratuity
Form N Application made to the labour commissioner by an employee
Form T Application for recovery of gratuity


According to the Payment of Gratuity Act of 1972, when the employee has been terminated due to disorderly conduct wherein, he/she tries to physically harm individuals during his/her employment, an employer holds the right to forfeit their gratuity payment, either wholly or partially despite the employee having completed 5 and more years of service in a company.

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