Gratuity

The Gratuity Act for Employers: Compliance Guide

A practical guide to employer gratuity obligations, eligibility assessment, calculation and settlement documentation.

2025-08-01Original publication date

Employer focusedPractical compliance guidance

Current check requiredVerify official position before action

Current gratuity position — 2026

Read the historic Gratuity Act framework together with the Code on Social Security now in force.

The Ministry of Labour & Employment states that the four Labour Codes came into force on 21 November 2025. Its 2026 FAQs clarify that gratuity computation under the new regime applies with effect from 21 November 2025. Employers should therefore verify the employee’s separation date, applicable wage definition, service category and current rules before calculating or settling gratuity.

Official reference: Ministry of Labour & Employment — Additional FAQs on Labour Codes.

Current-law checkThis article is retained in full for reference and search continuity. Before acting on any legal or payroll position, verify the currently operative Act/Code provisions, commencement notifications, central or state rules, effective dates and official circulars applicable to the establishment.

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 current gratuity rules under the Labour Codes 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?
For expert guidance and hassle-free compliance support, reach out to us at MS Sankhla & Co. — your trusted partner for all labour law compliance services in India.

Gratuity eligibility 2026

Gratuity eligibility and calculation under the current Social Security Code

Who is eligible for gratuity in 2026?

Under the current Code on Social Security framework, the ordinary rule remains five years of continuous service. The five-year condition is not required for death, disablement or expiration of fixed-term employment. Ministry of Labour FAQs further clarify that a fixed-term employee becomes eligible after completing one year under the contract.

How is gratuity calculated under the current regime?

The Code provides gratuity at 15 days' wages for every completed year of service or part in excess of six months, based on the last drawn wages. Fixed-term and deceased-employee cases are addressed on a pro-rata basis under the current framework.

From when should employers apply the current Labour Code gratuity position?

The Ministry of Labour has clarified that gratuity calculation under the Labour Codes applies from 21 November 2025. Employers should verify the separation date, employment category and current wage definition before settlement. Official MoLE FAQ.