Gratuity Eligibility explained: this guide covers what Gratuity Eligibility means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Gratuity is a statutory retirement benefit under the Payment of Gratuity Act 1972 (being subsumed into the Social Security Code 2020). It is a lump sum payment by an employer to an employee as a token of appreciation for services rendered. Understanding eligibility, the calculation formula, and tax treatment is essential for both employers and employees.
Eligibility Conditions
- Employee must have completed at least 5 years of continuous service
- Gratuity is payable on: retirement, superannuation, resignation, death, or disablement
- For death/disablement: 5-year condition is waived
- "Continuous service" includes periods of illness, maternity leave, lay-off, and authorised absence
Gratuity Calculation Formula
Where: Last drawn salary = Basic Salary + Dearness Allowance; 15 days = 15/26 of monthly salary (month = 26 working days)
Example
Mr. Singh retires after 25 years with last drawn basic + DA = Rs. 60,000/month.
- Gratuity = Rs. 60,000 × 15/26 × 25 = Rs. 60,000 × 0.5769 × 25 = Rs. 8,65,385
Maximum Gratuity Limit
The maximum gratuity payable under the Act is Rs. 20 lakh (increased from Rs. 10 lakh). This limit applies per employee per employer. If the calculated amount exceeds Rs. 20 lakh, only Rs. 20 lakh is paid.
For Non-Covered Employees (Ex Gratia)
Employees not covered under the Gratuity Act (e.g., in establishments with less than 10 employees) may receive ex gratia gratuity. The Gratuity Act itself only covers establishments with 10+ employees.
Social Security Code 2020 Changes
- Gratuity payable to fixed-term employees proportionately (without the 5-year condition) — a significant change
- Working journalists: eligible after 3 years of service
Tax Exemption on Gratuity
| Category | Exemption |
|---|---|
| Government employees | Fully exempt |
| Non-government (Gratuity Act covered) | Least of: actual gratuity, 15 days × completed years, Rs. 20 lakh |
| Non-government (not Act covered) | Least of: actual gratuity, ½ month salary × years, Rs. 20 lakh |
Forfeiture of Gratuity
Gratuity can be forfeited (wholly or partially) if the employee is dismissed for: (a) moral turpitude, or (b) causing willful damage/loss to the employer's property. No forfeiture for ordinary misconduct leading to termination.
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