Gratuity: Meaning, Rules, Act, Eligibility & Form Details

Gratuity is a lump-sum benefit provided to employees for their long-term service. It is paid at the time of employment exit based on a prescribed formula. Understanding what is gratuity in salary helps employees what is the eligibility, how to calculate and the amount they may receive when they leave employment.

Key Highlights

• Eligibility: Requires five years of continuous service.
• Payment: Paid on retirement, resignation, or termination, subject to applicable rules.
• Nomination: Can nominate beneficiaries through Form F to receive gratuity after their death.

What is Gratuity?

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 a lump-sum amount usually given at the time of retirement, resignation, or upon death or disability. 

It applies to both government and private sector employees who meet the eligibility criteria and is calculated based on the last drawn salary and the number of years served. 

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 Payment of Gratuity Act, 1972 governs gratuity rules in India, and 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

The Eligibility Criteria for Gratuity are as follows :

• Minimum Service: Employees must generally complete 5 years of continuous service in an organization covered under the Gratuity Act.
• 240-Day Rule: Working 240 days in the fifth year may be considered as completing 5 years of service.
• Exceptions: The 5-year requirement does not apply in cases of death or permanent disablement.
• Fixed-Term Employees: Eligible for pro-rata gratuity after 1 year of continuous service.

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

• 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.

I. What is Form F & Form I and why are they required

There are two types of Gratuity forms:

• 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.

II. 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

III. Gratuity Form F PDF Download

The Form F can be downloaded from the official Labour Ministry website, or from the HR of the company the applicant is working for the latest version. Many employers also make it available via the internal HR portal.

Key Differences between Gratuity and Pension

The following table shows the key differences between Gratuity and Pension:

Final Word

Gratuity is an important retirement benefit that recognises employees for long-term service. Understanding eligibility, wage rules, and timelines helps employees receive the gratuity they are legally entitled to. Knowing what is gratuity and how gratuity in salary is calculated can help employees understand their compensation and plan their finances better.