In the event of an employee's death, the gratuity amount is paid to the nominee specified in Form F. If no nominee has been declared, the legal heir(s) of the deceased employee are entitled to claim the gratuity.
Index
What is Gratuity: Meaning, Rules, Act, Eligibility & Form Details
Gratuity in India is a statutory lump-sum payment made by an employer to an employee for long-term service, governed by the Payment of Gratuity Act, 1972. It is typically payable after 5 years of continuous service, or earlier in case of death or disablement. Let's understand about Gratuity, Eligibility, Rules, Form Details and many more.
Key Highlights:
- Under the new Labour Code, fixed-term and contract employees are now eligible for pro-rata gratuity after just 1 year of continuous service.
- Permanent employees still require 5 years.
- The changes apply prospectively from 21 November 2025.
- Wages definition has expanded (at least 50% of CTC in many cases), which can increase gratuity payouts.
What is Gratuity?
Gratuity is a financial reward paid to employees who have rendered continuous service for at least five years with the same employer. It is a lump sum amount usually given at the time of retirement, resignation, or upon death or disablement.
Gratuity is governed by the Payment of Gratuity Act, 1972 and applies to both government and private sector employees who meet the eligibility criteria. It is calculated based on the last drawn salary and the number of years served.
In salary terms, gratuity is not deducted monthly like PF. Instead, it is paid by the employer at the time of exit based on a specific formula, making it a significant component of long-term employee benefits.
Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 mandates that an employee who has rendered continuous service for at least five years is eligible to receive gratuity upon termination of employment. The Act applies to factories, mines, oilfields, plantations, ports, railways, shops, and establishments with 10 or more employees. The Act also outlines the formula for gratuity calculation and rules for payment, nomination, and dispute resolution.
The Payment of Gratuity Act, 1972 governs gratuity rules in India. It applies to:
- All establishments with 10 or more employees
- All employees working on salary or wages (excluding apprentices)
- Both private and public sector workers
Employers are legally required to pay gratuity once an employee is eligible, even if no formal request is made.
Eligibility Criteria for Gratuity
You are eligible for gratuity if:
- You have completed at least 5 years of continuous service with the employer.
- Work at an organisation covered under the Act (10+ employees).
- You leave due to retirement, resignation, termination (not for misconduct), death, or disability.
4 years + 240 days rule: As per Madras High Court interpretation and Section 2A, working 240 days in the 5th year is often deemed as completing 5 years of continuous service, making the employee eligible.
Death or Disablement: The 5-year condition is completely waived. Gratuity is payable even if the employee worked for a few months. Nominee or legal heirs receive the amount."
How Gratuity Works in India
In India, gratuity is:
- Paid by the employer at the time of exit (retirement, resignation, etc.)
- Tax-free up to ₹20 lakh under the Income Tax Act
- Not deducted monthly like provident fund or insurance
- Calculated using a legally defined formula for salaried employees
Employers may also offer a higher amount than the statutory requirement at their discretion.
Gratuity Formula
Gratuity is calculated using the formula:
Gratuity = (Last Drawn Salary × 15 × Completed Years) ÷ 26
Where,
- Last Drawn Salary = Basic + Dearness Allowance (DA)
- 15 is the number of days’ salary paid for each year of service.
- 26 is the number of working days in a month (excluding Sundays).
Example: If your last drawn salary is ₹40,000 and you've worked for 8 years,
Gratuity = ₹40,000 × 15 × 8 ÷ 26 = ₹1,84,615
When Can Employer Forfeit Gratuity?
Employer can forfeit gratuity only in these cases:
- Wilful damage/loss to employer’s property (forfeited to the extent of damage).
- Termination for riotous/disorderly conduct or violence.
- Termination for act involving moral turpitude committed during employment. A proper domestic inquiry is mandatory. Minor misconduct or simple resignation does not allow forfeiture.
Death / Disablement Table for Gratuity Payment
Tenure at Death | Gratuity Payable |
Less than 1 year | 2 × monthly salary |
1–5 years | Pro-rata or full as per rules |
Above 5 years | Full calculated amount |
Gratuity Rules in India
Key gratuity rules include:
- 5 years of continuous service is mandatory, unless in the event of death or disability.
- 15 days' wages are paid for every completed year of service.
- The wage considered includes basic salary + dearness allowance only.
- The gratuity amount must be paid within 30 days from the date it becomes payable.
- Non-payment within time attracts interest and penalties.
What is Gratuity Nominee?
- A gratuity nominee is the person an employee names to receive the gratuity in case of their death.
- Nomination must be submitted in Form F.
- If no nominee is registered, the gratuity is paid to legal heirs.
Gratuity Forms
There are several forms under the Gratuity Act, but Form F and Form I are the most common.
What is Form F & Form I and Why It’s Required
- Form F: Used by employees to nominate one or more persons to receive gratuity after their death.
- Form I: Application to claim gratuity upon resignation, retirement, or superannuation.
How to Fill Form F?
Follow the steps given below to fill Form F:
- Enter employee details (name, address, designation, employee ID)
- Provide nominee(s) name, address, age, relationship
- Specify share of gratuity for each nominee
- Sign and date the form
Gratuity Form F PDF Download
You can download Form F from the official Labour Ministry website, or ask your HR for the latest version. Many employers also make it available via the internal HR portal.
Key Differences Between Gratuity and Pension
Gratuity and pension are both post-employment benefits, but they differ significantly in purpose, payment structure, and eligibility. Here's a comparison to help you understand the key distinction:
Feature | Gratuity | Pension |
| Payment Type | One-time lump sum | Regular monthly payment |
| Paid By | Employer | Employer (in govt) or pension fund |
| Eligibility | Min. 5 years of service (usually) | Depends on scheme & service period |
| Tax Benefits | Up to ₹20 & ₹25 lakh tax-free for Privale & Government employees | Partially taxable depending on source |
| Nomination | Via Form F | Usually part of the pension enrollment |
Gratuity is a crucial financial benefit that rewards long-serving employees for their dedication and loyalty. Understanding what gratuity is, how it works in India, its rules, forms like Form F, and its difference from pension can help you plan your finances more effectively. Whether you’re resigning, retiring, or just want to know your rights under the Gratuity Act 1972, staying informed ensures you claim what you rightfully deserve.
Frequently Asked Questions
What is gratuity in salary?
Why is gratuity needed?
Is gratuity deducted from salary?
Is gratuity mandatory in India?
Is gratuity part of CTC?
How to claim gratuity?
What is the rule of gratuity for private companies?
Who is the nominee in gratuity?
Who will get gratuity after death?
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