The Payment of Gratuity Act, 1972: Your Ultimate Guide
This 2025 guide demystifies India’s Gratuity Rules. Understand your eligibility, use the gratuity calculator, and learn how to claim your statutory benefit under the 1972 Act.
Gratuity Act 1972: Core Rules Explained
Who is Covered?
10+
The Act applies to establishments with 10 or more employees. Once covered, the law continues to apply even if the employee count drops below 10.
Maximum Payout Cap
₹20 Lakhs
The maximum amount an employer is legally required to pay. This is also the lifetime limit for tax exemption in the private sector.
Gratuity Eligibility Rules: The 4 Years 240 Days Condition
The “4 Years, 240 Days” Rule
The law is on your side. You don’t need to complete five full calendar years. If you’ve worked for 240 days in your fifth year of service, you are legally eligible for gratuity.
This means service of approximately 4 years and 8 months makes you eligible. Don’t forfeit your benefit by resigning a few months too early!
When the 5-Year Rule is Waived
The minimum service requirement is completely waived if employment is terminated due to death or disablement, ensuring immediate financial support for the employee or their family.
Gratuity Calculation: The Official Formula
Your gratuity amount depends on the official formula under the 1972 Act. This calculation is based on your last drawn salary and total years of service.
The Statutory Formula
- Last Salary: Basic Pay + Dearness Allowance (DA).
- Years of Service: Rounded up to the next year if you’ve served over 6 months in your final year.
- Why 26? Represents the average number of working days in a month (30 days – 4 Sundays).
Online Gratuity Calculator
Try the Gratuity Calculator ↗Calculation Impact
The denominator in the formula significantly changes the final amount. Here’s a comparison for an employee with a ₹60,000 salary and 11 years of service.
How to Claim Gratuity: The 30-Day Payout Process
The law mandates a strict, time-bound process. Follow these steps to claim your gratuity. The employer MUST pay within 30 days of your last day, otherwise they are liable for interest.
1. You Apply
Submit ‘Form I’ to your employer to initiate the claim.
2. Employer Verifies
Your employer calculates the amount payable and issues ‘Form L’.
3. Payout in 30 Days
The full amount must be paid within 30 days. Delay incurs interest.
4. Dispute?
If denied or unpaid, approach the Controlling Authority.
Gratuity Forfeiture Rules & Supreme Court Rulings
Yes, but only under specific conditions. The latest Supreme Court rulings on gratuity forfeiture clarify the grounds for withholding payment due to employee misconduct.
The Principle of Proportionality
The Supreme Court ruled that forfeiture must be proportional to the misconduct. An employer cannot withhold the entire gratuity for a minor infraction. A fair departmental inquiry is mandatory, but a criminal conviction is not required.
- Full Forfeiture: Justified for severe misconduct like fraud at the time of hiring.
- Partial Forfeiture: Applied for lesser offences, ensuring the penalty is not excessively harsh.
Forfeiture Scenarios: SC Ruling Impact
Gratuity Taxation: Is Your Gratuity Taxable?
Tax exemptions depend on your employment sector. The ₹20 Lakh cap is a lifetime limit for private employees.
Tax Exemption Comparison
Government employees enjoy a full tax exemption, which was recently raised to ₹25 Lakhs. For private sector employees, the exemption is the *least* of three amounts: actual gratuity received, ₹20 Lakhs, or the amount from the statutory formula.
New Gratuity Rules: The Code on Social Security
The upcoming labor code will bring significant changes, expanding gratuity benefits to more workers and altering how it’s calculated.
New “Wages” Definition
Basic Pay + DA will have to be at least 50% of your total pay. This will likely increase the gratuity amount for most private sector employees.
Expanded Eligibility
The new code extends gratuity to workers previously left out, marking a major step towards universal social security.
Gratuity Act FAQs: Your Questions Answered
Yes. You are eligible for gratuity after resigning if you have completed ‘continuous service’ of 4 years and 240 days. You do not need to complete a full 5 calendar years.
If your employer fails to pay within 30 days, you should first send them a formal written demand. If they still don’t pay, you can file a complaint with the Controlling Authority appointed under the Act in your region. The authority will hear your case and can order the employer to pay the amount due, along with interest.
Under the current 1972 Act, contract employees may be eligible if they are considered employees of the principal employer and meet the service criteria. The new Code on Social Security makes this explicit: fixed-term employees will get gratuity on a pro-rata basis after one year of service.
No. For gratuity calculation under the Act, ‘salary’ is defined as your Basic Pay plus Dearness Allowance (DA) only. All other allowances like HRA, medical, travel, and performance bonuses are excluded.
Yes. The Act sets the minimum amount an employer is legally required to pay. An employer is always free to pay a higher, more generous amount of gratuity. Any amount paid above the statutory formula or the ₹20 lakh cap is considered a voluntary ex-gratia payment.
No. Gratuity received by a nominee or legal heir upon the death of an employee is completely exempt from income tax in the hands of the recipient, regardless of the amount.
