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.
What is Gratuity: Meaning, Rules, Act, Eligibility & Form Details
Gratuity is a financial reward paid to employees who have rendered continuous service for at least five years with the same employer. 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.
Key Highlights
- Fixed-term: Contract employees are now eligible for pro-rata gratuity after just 1 year of continuous service.
- Permanent: Regular employees still require a minimum of 5 years of service to qualify.
- Timeline: These structural changes apply prospectively following the official implementation on 21 November 2025.
- Wages: The legal definition has expanded to a minimum of 50% of CTC, effectively increasing final payouts.
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 Act also outlines the formula for gratuity calculation and rules for payment, nomination, and dispute resolution.
The Act applies to factories, mines, oilfields, plantations, ports, railways, shops, and establishments with 10 or more employees. 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
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
For employees covered under the Gratuity Act, the minimum 5-year service requirement does not apply if the employee dies or becomes permanently disabled. In such cases, gratuity is calculated based on the actual period of service and is paid to the employee's nominee or legal heirs.
Gratuity Rules in India
The 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 are they 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
The Form F can be downloaded from the official Labour Ministry website, or from the HR of the company the applicant is working in 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 payment | Regular monthly payment |
| Paid By | Employer | Employer (government sector) or pension fund |
| Eligibility | Usually requires a minimum of 5 years of continuous service | Depends on the pension scheme and length of service |
| Tax Benefits | Tax-free up to ₹20 lakh for non-government employees and fully exempt for government employees (subject to applicable rules) | Taxability depends on the type and source of pension |
| Nomination | Through Form F under the Payment of Gratuity Act | Usually specified during pension enrollment |
Gratuity is an important retirement benefit that rewards employees for long-term service. With recent labour reforms in force, understanding eligibility, wage rules, and timelines helps employees receive the gratuity they are legally entitled to.
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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