Gratuity: Who Is Eligible, How It Is Calculated and How to Claim

Gratuity is a lump sum an employer pays when employment ends. Since 21 November 2025 it is governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. Most employees qualify after five years of continuous service; fixed-term employees qualify after one year; and no minimum applies when employment ends by death or disablement. The amount is 15 days' wages for each completed year of service, worked out on the last wages drawn, up to a ceiling the Central Government notifies.

This guide covers which law applies now, who is eligible, the continuous service rules, the formula, the ceiling, forfeiture, and how to claim and challenge a refusal.

Which law applies now

The Government brought the four labour codes into force with effect from 21 November 2025. The Code on Social Security, 2020 now contains the gratuity provisions (Chapter V, sections 53 to 57), and the Industrial Relations Code, 2020 deals with fixed-term employment. The Government's announcement said that during the transition, relevant provisions of the existing Acts and their rules, notifications and schemes would continue in force.

The Central Government then notified the Social Security (Central) Rules, 2026 on 8 May 2026. They supersede the Payment of Gratuity (Central) Rules, 1972 and set out the gratuity forms and timelines described below. These Central rules apply where the Central Government is the "appropriate Government", which under the Code includes establishments with branches in more than one State. Other employers come under rules made by their State, which may number the forms differently, so check your State labour department's notifications.

Who is eligible

Under section 53(1) gratuity becomes payable when employment ends after at least five years of continuous service in any of these ways:

• Superannuation or retirement.
• Resignation.
• Death or disablement due to accident or disease.
• Termination of the employment on expiry of a fixed-term contract.
• Any other event the Central Government notifies.

Three exceptions matter. The five-year condition does not apply on death, disablement, or expiry of fixed-term employment. Working journalists qualify after three years. And a fixed-term employee becomes eligible after one year of service under the contract; the Industrial Relations Code says so in its definition of fixed-term employment, and the 2026 Central rules add that a further period of more than six months but less than a year is rounded up to one additional year.

Employees covered by their own gratuity rules under the Central or a State Government (most government servants) are outside this scheme. On an employee's death, gratuity goes to the nominee or, if there is none, to the legal heirs. A minor's share is deposited with the competent authority, and rule 31 of the 2026 Central rules requires the authority to invest it in a term deposit with the State Bank of India or a nationalised bank for the minor's benefit until the minor comes of age.

An illustration of the fixed-term rule, not a real case: a worker engaged on a fixed-term contract that runs for one year and seven months is entitled to gratuity at the end of the contract, calculated as if for two years, because the seven months exceed six months. A contract of eleven months does not qualify, however long the hours.

Continuous service and the 240-day question

Section 54 of the Code defines continuous service. Service counts as continuous despite interruptions for sickness, accident, leave, lay-off, strike, lock-out, a stoppage not due to the employee's fault, and absence without leave unless the employer's standing orders or rules treat it as a break.

Where service was not uninterrupted, an employee is deemed to have been in continuous service for one year if he or she actually worked at least 240 days in the preceding twelve calendar months (190 days for underground mines and establishments working less than six days a week). Days of permitted lay-off, earned leave with full wages, temporary disablement from a work accident, and maternity leave up to 26 weeks are counted as days worked.

Many employees resign after four years and a few months, believing that 240 days in the fifth year completes five years. High Courts have not taken a uniform view. Some decisions have accepted it, while in M/s Alvas Institute of Engineering v State of Karnataka (28 June 2022) the Karnataka High Court refused gratuity to an employee who resigned voluntarily before completing five years, holding that the deemed-service rule could not be used to fill the gap. If you are close to the line, do not assume you qualify; take advice before fixing your last working day.

Whatever your length of service, keep the evidence that proves it: your appointment letter, salary slips, bank credits, your provident fund passbook, Form 16 certificates, and the employer's written acceptance of your resignation with the relieving date. Many gratuity disputes turn on dates, and documents are what settle them.

How gratuity is calculated

For monthly-rated employees the explanation to section 53 converts monthly wages into a daily figure by dividing by 26. The formula is:

An illustration, not a real case: an employee whose last monthly wages were Rs 52,000 and who served 6 years and 8 months is treated as having 7 completed years. 52,000 x 15 / 26 = Rs 30,000 per year of service, and 30,000 x 7 = Rs 2,10,000.

"Wages" under the Code means basic pay, dearness allowance and retaining allowance, with certain items excluded. If the excluded allowances exceed half of total remuneration, the excess is added back into wages. This rule matters for salary structures that keep basic pay low, because it can raise the gratuity figure. Piece-rated and seasonal employees have their own calculation rules in section 53(2).

The ceiling

Section 53(3) says gratuity payable under the Code cannot exceed the amount the Central Government notifies. Under the old Act, the Central Government notified Rs 20 lakh in March 2018. Check whether a fresh figure has been notified under the Code before relying on Rs 20 lakh in a claim. The cap limits only the statutory entitlement: section 53(5) preserves any better terms under an award, agreement or contract with the employer, so a contractual gratuity above the cap is still enforceable as a contract.

Interest is the other number to watch. Section 56 requires the employer to arrange payment within 30 days of the date gratuity becomes payable. If it does not, it must pay simple interest from that date at a rate the Central Government notifies, which cannot exceed the rate for repayment of long-term deposits. No interest is due if the delay was caused by the employee's own fault and the employer obtained the competent authority's written permission for the delay.

When gratuity can be forfeited

Section 53(6) lists the only grounds:

• Where services are terminated for an act, wilful omission or negligence causing damage, loss or destruction of the employer's property, gratuity can be forfeited to the extent of that damage or loss.
• Where services are terminated for riotous or disorderly conduct or any other act of violence, it can be forfeited wholly or partly.
• Where services are terminated for an offence involving moral turpitude committed in the course of employment, it can be forfeited wholly or partly.

How to claim gratuity, step by step

The steps below follow rule 33 of the Social Security (Central) Rules, 2026. State rules may differ in form numbers and details.

1. Apply to the employer in Form IV, ordinarily within 30 days of gratuity becoming payable. If your retirement date is known, you may apply up to 30 days before it. A late application must still be entertained if you show sufficient cause. A nominee also has 30 days; a legal heir has one year.
2. Send it electronically, by hand against receipt, or by registered speed post, and keep proof. A gratuity application letter covering the Form IV details helps.
3. Within 15 days of receiving the application, the employer must issue a notice in Form V either stating the amount and fixing a payment date no later than the 30th day after receiving the application, or giving reasons for rejecting the claim (with a copy to the competent authority).
4. Payment must be made by demand draft or bank credit. Section 56 requires payment within 30 days of gratuity becoming payable, with simple interest for delay.
5. If the employer refuses the application, pays too little, rejects the claim, or does not respond in time, apply to the competent authority in Form VI within 180 days. Late applications can be admitted for sufficient cause.
6. The competent authority hears both sides, may proceed ex parte if the employer does not appear, and should decide within six months (extendable by three months). If it finds gratuity payable, it directs the employer in Form VIII to pay within 30 days.
7. Either side can appeal within 60 days to the appellate authority, extendable by another 60 days for sufficient cause. An employer's appeal is admitted only after the required deposit.
8. If the employer still does not pay, apply in Form IX for recovery under section 129 of the Code.

Nomination

Under the 2026 Central rules, an employee should file a nomination in Form III, ordinarily within 90 days of completing one year of service, giving the nominee's Aadhaar details. The employer must verify it and return an attested duplicate within 30 days. An employee with no family when nominating must file a fresh nomination within 90 days of acquiring a family. A nomination takes effect when the employer receives it. A missing or outdated nomination is one of the most common reasons a family's claim is delayed.

Paperwork around your exit

Gratuity is usually settled as part of the full and final settlement. Ask for a written statement that shows gratuity separately from salary, leave encashment and other dues; a full and final settlement letter that lists each component makes errors easy to spot. If you resign, a dated resignation letter fixes your last working day, which in turn fixes your length of service. Your relieving letter should not be held back as leverage over gratuity. Our guides on the full and final settlement timeline and on notice periods cover the rest of the exit process.

For unpaid salary and other dues beyond gratuity, LegalFirms has a guide to salary recovery remedies, and you can consult an employment lawyer if the employer contests your service period or wages.