Gratuity is a statutory lump sum payable when an employee leaves after five years of continuous service — roughly 15 days' wages per completed year, computed as last drawn basic plus DA × 15/26 × years of service. Under the labour codes in force since 21 November 2025, fixed-term employees earn it pro-rata after just one year. Receipts are tax-exempt up to ₹20 lakh for covered private-sector employees.
The gratuity framework applies once an establishment has employed 10 or more people, and it keeps applying even if headcount later falls. The five-year condition is waived on death or disablement, and the labour codes' one-year pro-rata rule for fixed-term staff means contract-style hiring no longer avoids the liability. Payment is due within 30 days of becoming payable; delay attracts interest.
For the employer this is an accruing liability, not a surprise: it builds every year an employee serves, and the labour codes' wage definition — 'wages' at least half of total pay — widens the calculation base for many salary structures. Provision for it in the books annually; larger employers use actuarial valuations, smaller ones at least a per-employee spreadsheet estimate. A gratuity that surfaces only at resignation time is a cash-flow shock you scheduled yourself.
Two edge points. Courts have in several rulings treated roughly four years and eight months of service as satisfying the five-year test, so don't assume a 4.8-year leaver gets nothing — take advice before refusing. And ₹20 lakh is a tax-exemption ceiling, not a cap on what you can pay; amounts above it are simply taxable in the employee's hands.
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Frequently asked
- What is Gratuity?
- Gratuity is a statutory lump sum payable when an employee leaves after five years of continuous service — roughly 15 days' wages per completed year, computed as last drawn basic plus DA × 15/26 × years of service. Under the labour codes in force since 21 November 2025, fixed-term employees earn it pro-rata after just one year. Receipts are tax-exempt up to ₹20 lakh for covered private-sector employees.
- Who is eligible for gratuity?
- An employee leaving after five years of continuous service, in an establishment that has employed 10 or more people. Under the labour codes in force since 21 November 2025, fixed-term employees earn it pro-rata after just one year, and the five-year condition is waived on death or disablement.
- How much gratuity is tax-free?
- Receipts are tax-exempt up to ₹20 lakh for covered private-sector employees; amounts above it are simply taxable in the employee's hands. Payment is due within 30 days of becoming payable; delay attracts interest.
Reviewed to the law in force in FY 2026-27. General information, not advice — confirm the position for your facts before acting.
