Gratuity Rules- Everything You Need To Know

Gratuity Rules in India are very clear. It states that every employee is eligible to get a lump sum amount at the time of leaving the job. The government has also made a formula of gratuity amount. Every employer has to pay the gratuity according to the formula. According to gratuity act, every employer, who has 10 or more employee, has to follow gratuity law. This law is applicable to government and private sector both. The government also give tax exemption on the gratuity payment.

What is Gratuity | Meaning of Gratuity

According to the Oxford Dictionary, The meaning of gratuity is a ‘A sum of money paid to an employee at the end of a period of employment.’ Gratuity also means a tip given for good service. But, In this case, we will refer to the first meaning.

The Gratuity is a lump sum amount given to the employee by the employer as a mark of recognition. It is given at the end of service which may be the retirement or resignation. Since the formula for gratuity amount is fixed, It is a ‘defined benefit’ plan.

You can know your gratuity amount in advance. The amount of gratuity depends only upon the tenure of service and last drawn salary. But there are many rules of gratuity and you must learn about them.

Gratuity Rules

Every employer is bound to give gratuity amount to its employees if it employs more than 10 people. But you would get the gratuity only after completing 5 years in the service. There many more rules of gratuity. Let us understand them one by one.

5 Years Continuous Service

You will get the gratuity only after the completion of 5 years in the service. Also, there should not be any break in the service. It must be continuous.

Note, the condition of 5 years service has a small relaxation. You can even get gratuity after the service of 4 years and 7 months. In fact, to calculate the duration of service, the months are rounded to the nearest year. Since 4 years and 7 months is nearer to the 5 years, the period of service is considered as the 5 years.

Continuous service means uninterrupted service. But, it does include the interruption due to, leave, sickness or accident. The strike, lay-off, or a lockout is also not considered as an interruption. Indeed, any interruption which is not due to the fault of the employee, would not be counted. But, if you have taken a sabbatical or leave without pay, then your service would get interrupted.

Gratuity Only After Leaving Job

An employee is entitled to get gratuity only after the termination of the employment. This termination may be of retirement, resignation or job switch. So, It is clear, you are not going to get gratuity while in the job.

Death or Disablement Relaxation

The minimum 5-year service rule is not applicable in case of death or disablement. The gratuity amount would be given to the nominee or legal heirs.

Gratuity is Non-Taxable

Gratuity amount is totally tax-free. However, it should be given according to the prescribed gratuity formula. Any amount above this formula would be subject to the tax.

Employer Can give Excess Gratuity

An employer can give gratuity more than the prescribed formula. But the excess gratuity would be added to your taxable income.

Gratuity Limit

The gratuity amount is free from tax but this is subject to a maximum limit. If you get gratuity more than the limit, the excess amount would be taxable. The Government has recently increased the gratuity limit to 20 lakhs. Earlier it was 10 lakhs.

Gratuity Rules Applicable If Employees Are More Than 10

Every factory or establishment would pay gratuity to its employees. The gratuity rules are not mandatory for the factory or establishment which employs less than 10 persons. The number of employees would be counted as the average of last 12 months.

Protected Against Liabilities

No court can attach gratuity amount. Whether there is a decree against the employee from a civil or criminal court.

Forfeiture Of Gratuity If There is a Damage

An employer can forfeit gratuity if an employee makes a loss to the company. The forfeiture would be to compensate the loss. However, the employer must terminate the services of the employee because of this damage.

Gratuity rules, Tax, Gratuity Formula

The longer you stay in a service, the more you get gratuity

Gratuity Formula

There is a gratuity formula for the payment. According to this formula, 15 days salary is given for every completed year. Since the number of days in the month is considered only 26, you will get 15/26 of your one-month salary for every completed year.

The Gratuity Formula

Gratuity Amount = las drawn monthly Salary x Tenure of service in years x 15/26


The salary includes basic pay, dearness allowances, and commission. The last drawn salary is considered for gratuity calculation. If the employee is a daily wage earner, the average of last 3-month wage is considered a one-day salary.

Service Tenure

The continuous duration of service. More than 6-month service in a year is calculated as one year.

Gratuity Percentage

For every year, you will get 57.69% of monthly salary as the gratuity. Note, the monthly salary would be last drawn salary and it includes only Basic+DA+commission. To know the exact amount of your gratuity you can use the gratuity calculator.

Gratuity Exemption

There is a limit of gratuity exemption from tax. Gratuity of more than 20 lakhs would be liable to the tax. The employee must pay the tax on the gratuity over and above the Rs 20,00,000. Earlier this limit was only 10 lakhs.

I have tried to share the knowledge of gratuity, in a nutshell. You can also read the whole gratuity act for a better understanding of gratuity rules and minute details.

1 thought on “Gratuity Rules- Everything You Need To Know

  1. It is seen that gratuity rules ,not act , are different in different banks . In some Banks for service over 30 years gratuity should be paid @ONE -HALF months ie 45 days per year(In Canara Bank) , while in some banks it is @15 days .
    Please clarify from where the idea of ONE -HALF months came.

    The matter has come into light after CLC Hyderabad judgement in this respect. In the said judgement it is also said that in the definition of pay the Dearness Allowance components also to be taken .

    Please enquire and clarify.
    Thank You.

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