Gratuity in India: Calculation, Eligibility, How to Claim and Disputes (2026)

Explainer · Employment Law

Updated for 2026 · Claw Editorial

Most people hear about gratuity only when they resign or retire, and then they have three questions: am I eligible, how much will I get, and what if my employer does not pay. Gratuity is a lump sum an employer pays to an employee who has completed at least 5 years of continuous service, under the Payment of Gratuity Act 1972. The formula is last drawn salary x 15/26 x years of service, and the amount is capped at Rs 20 lakh. This guide explains each step in simple words.

01What gratuity is

Gratuity is a reward for long service. It is paid by the employer once, as a lump sum, when the employee leaves the job. The rules come from the Payment of Gratuity Act, 1972, which applies to factories, mines, oil fields, plantations, ports, railways, shops and establishments, and other workplaces with 10 or more employees.

Once an establishment is covered, it stays covered even if headcount later falls below 10. The employee does not contribute to gratuity. It is paid fully by the employer, and it is separate from provident fund.

02Who is eligible for gratuity

Under the 1972 Act, an employee becomes eligible when three things are true: the workplace is covered, the employee has completed 5 years of continuous service, and the employment ends in one of the following ways.

• Superannuation (retirement).
• Retirement or resignation.
• Death or disablement due to accident or disease.

The 5-year rule and its exceptions

The 5-year rule does not apply when employment ends because of death or disablement. In that case gratuity is payable even if the employee had worked for less than 5 years. If the employee dies, the amount goes to the nominee, or to legal heirs if there is no nomination.

What counts as 5 years

In practice, courts and the labour department treat a period of more than 4 years and 240 days as 5 years in many cases, but this depends on the working week and the facts. Continuous service is not broken by approved leave, sickness, accident or a lawful strike.

Can gratuity be refused?

Gratuity can be forfeited in limited cases only: where service was terminated for an act causing damage or loss to the employer's property (to the extent of the loss), or for a violent or riotous act, or for an offence involving moral turpitude committed in the course of employment. A mere allegation is not enough, and the employer must follow the process.

03How to calculate gratuity (the formula in words)

For employees covered by the Act, gratuity is worked out as 15 days of wages for every completed year of service. Since a month is taken as 26 working days, the formula is:

Gratuity = last drawn salary x 15/26 x number of years of service

What "salary" means

Here salary means basic pay plus dearness allowance (DA), if any. It does not include HRA, bonus, overtime or special allowances. Always check your pay slip for the exact basic and DA figures.

Rounding the years

If you have worked more than 6 months in the last year, it is counted as a full year. So 12 years and 7 months is counted as 13 years. 12 years and 5 months is counted as 12 years.

Worked example

Step by step: 50,000 x 15 = 7,50,000. Divide by 26 to get about 28,846. Multiply by 13 to get Rs 3,75,000. For service of exactly 12 years, the same salary gives about Rs 3,46,154.

The upper limit

The Act caps gratuity at Rs 20 lakh. If the formula gives more, the employer is not bound under the Act to pay above the cap, though an employer may pay more under its own policy or contract.

Employees not covered by the Act

If your employer is not covered, gratuity under the tax rules is worked out on half a month's average salary for each completed year, using the last 10 months' average. This matters for the tax exemption, not for a legal claim under the Act.

04Tax on gratuity

Gratuity received on retirement, resignation or death is taxable only to the extent it exceeds the exemption limit. For private sector employees covered by the Act, the exempt amount is the lowest of these three:

• The gratuity actually received.
• The amount worked out by the 15/26 formula.
• Rs 20 lakh.

Anything above the exempt amount is added to your income as "salary" and taxed at your slab rate. Gratuity paid to the legal heirs of a deceased employee is generally exempt. Government employees have a separate position under the tax rules. Tax rules change often, so confirm the current position with a chartered accountant.

05How to claim gratuity

Claiming gratuity is a simple process if you do it on time.

1. Nominate someone early. While in service, file a nomination in Form F with your employer. This helps your family if something happens to you.
2. Apply in Form I. When gratuity becomes payable, apply to your employer in Form I, ordinarily within 30 days. A written application on plain paper is also accepted, and the employer has to pay even if you did not apply.
3. Employer decision. The employer must pay within 30 days from the date it becomes payable. If the amount is not paid on time, simple interest is payable at the notified rate. If the employer wants to deny gratuity, it must give the employee a written notice with reasons.
4. Go to the Controlling Authority. If the employer refuses or delays, you can apply to the Controlling Authority (usually the Assistant Labour Commissioner or a similar officer of the area).

Keep copies of your appointment letter, pay slips, resignation or relieving letter, and your Form I with proof of delivery. These documents prove your years of service and last drawn salary.

06What to do if gratuity is not paid

If your employer does not pay, do not wait. These steps usually work in order.

Step 1: Send a written demand

Send an email and a registered letter or legal notice asking for payment, with your calculation. Many employers pay at this stage.

Step 2: File Form N before the Controlling Authority

The Form N application asks the Controlling Authority to direct payment. It should be filed within 90 days of the amount becoming due. The authority can condone delay if you show good reason, so a late application is not necessarily dead.

The Controlling Authority holds an inquiry, hears both sides, and can order the employer to pay the gratuity with interest. If the employer fails to pay, the amount can be recovered like arrears of land revenue, and non-payment is also punishable under the Act.

Step 3: Appeal, if needed

An employer who disagrees with the order must deposit the gratuity amount before appealing to the Appellate Authority, and the appeal period is 60 days. After that, the remedy is a writ petition in the High Court on points of law.

Disputes often turn on three points: whether service was continuous, what the last drawn salary was, and whether the employer has a valid reason to forfeit. Having your records in order is half the case.

07Where Claw fits

Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.

If your gratuity matter turns into a dispute before the Controlling Authority, the Appellate Authority or the High Court, lawyers handling it need to find on-point judgments quickly and track the hearing dates. Claw's AI-based case search covers the Supreme Court and 25 High Courts, and its case management helps track cases and cause lists in one place. Claw has a free plan for individual advocates. For tool options, see AI legal tool alternatives in India.

This guide is general information, not legal advice. Claw is not a gratuity calculator or a substitute for a labour lawyer.

08Sources and further reading

• Payment of Gratuity Act, 1972 and Central Rules: indiacode.nic.in
• Ministry of Labour and Employment: labour.gov.in
• Income Tax Department: incometax.gov.in
• Claw: clawlaw.in

Last verified: October 2026. Limits, forms and tax rules can change, so confirm with the official sources before acting.

09Frequently asked questions