The Payment of Gratuity Act, 1972, is a crucial social security legislation in India, offering a financial reward to employees for their long-term service. Understanding its provisions is essential for both employers and employees to ensure compliance and entitlement, respectively. In this blog, we’ll provide a detailed overview of the Gratuity Act, its benefits, eligibility criteria, calculation method, and compliance requirements.
What is the Gratuity Act?
The Payment of Gratuity Act, 1972 mandates the payment of gratuity to employees who have rendered continuous service for at least five years in an organisation. It is a statutory benefit provided to employees as a token of appreciation for their past services and loyalty.
Applicability of the Gratuity Act
The Act applies to:
- All factories, mines, oilfields, plantations, ports, and railway companies.
- Shops or establishments with 10 or more employees on any day in the preceding 12 months.
Once covered, the Act continues to apply even if the number of employees falls below 10.
Eligibility for Gratuity
To be eligible for gratuity under the Act, an employee must:
- Have completed at least five years of continuous service with the same employer.
- Be eligible in the event of retirement, resignation, superannuation, or death/disability due to accident or illness (in the case of death/disability, the 5-year rule is not applicable).
Gratuity Calculation Formula
The gratuity amount is calculated using the following formula:
Gratuity = (Last drawn salary × 15 × number of completed years of service) / 26
Where:
- Last drawn salary includes basic salary and dearness allowance.
- 15 represents 15 days’ salary for every completed year.
- 26 is the number of working days in a month (as per the Act).
Example:
If an employee has worked for 10 years and their last drawn salary is ₹30,000:
Gratuity = (30,000 × 15 × 10) / 26 = ₹1,73,077 approx.
Tax Exemption on Gratuity
Gratuity received by employees is tax-free up to a certain limit under Section 10(10) of the Income Tax Act, 1961. Currently, the exemption limit is ₹20 lakhs for non-government employees. For government labour, the entire amount is tax-free.
Employer’s Responsibility Under the Gratuity Act
Employers must:
- Ensure timely payment of gratuity within 30 days from the date it becomes payable.
- Submit Form A (Notice of Opening) to the concerned authority when the establishment comes under the purview of the Act.
- Maintain proper records and registers of gratuity payments and employee service.
- In case of delayed payment, interest must be paid on the gratuity amount.
Forfeiture of Gratuity
Gratuity may be wholly or partially forfeited by the employer under the following circumstances:
- If the employee’s services are terminated due to disorderly conduct involving violence.
- If found guilty of an offence involving moral turpitude during the course of employment.
Nomination under Gratuity Act
Employees are required to submit Form F to nominate a person who would receive the gratuity in the event of their death. This nomination can be changed at any time by submitting a revised Form F.
Gratuity Compliance Support for Employers
Gratuity compliance is not just about paying the amount; it also involves:
- Accurate employee service records,
- Timely filing of relevant forms and registers,
- Adherence to labour laws and inspection-ready documentation.
To avoid penalties and ensure smooth operations, many organisations opt for gratuity compliance services provided by professional labour law consultants.
The Gratuity Act in India is an important employee welfare measure that also reflects the employer’s commitment to ethical practices. Ensuring compliance with the Act is not only a legal obligation but also builds trust and enhances employee retention.
Employers must stay updated with any changes in the law and maintain accurate documentation. Employees, on the other hand, should be aware of their rights and the process to claim gratuity.

Need Assistance with Gratuity Compliance?
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