How Gratuity Works in India: Eligibility, Amount, and Timelines

Gratuity is a payment made by an employer as a mark of gratitude for long, continuous service, usually when the employee leaves, retires, or dies. Many employees don't claim it correctly, or accept less than they are owed, simply because the rules aren't widely understood.

Who is eligible

Generally, an employee becomes eligible after five years of continuous service with the same employer. The five-year condition is relaxed in cases of death or disablement. Gratuity applies to establishments covered by the law, which broadly includes factories, shops, and other organised workplaces above a prescribed size.

How the amount is worked out

For most covered employees, the usual formula is based on the last drawn salary and the years of service, and there is an upper limit on the amount that is tax-free and payable under the statute.

• Last drawn monthly salary, meaning basic pay and dearness allowance
• Fifteen days' wages for each completed year of service, with the daily rate taken as the monthly figure divided by 26
• A part of a year beyond six months is generally counted as a full year
• A statutory ceiling applies to the amount, though employers can choose to pay more

Timelines and delay

The employer is expected to pay within a fixed period after gratuity becomes due, and delay can attract interest. If it is withheld, the usual steps are a written demand, and then an application before the authority appointed to hear gratuity claims.

The takeaway

Know your joining date, your last drawn salary, and your total years of service before you leave a job, and keep your service records. Most gratuity disputes are really disputes about these figures.