A guide for employees, HR and founders
Gratuity in India, explained plainly.
Last reviewed:
For most long-serving people, gratuity is the largest single payment they will ever receive from an employer — and the one they understand least. The law behind it was rewritten on 21 November 2025, the tax section was renumbered on 1 April 2026, and most of what is circulating online still describes the old regime. Here is what actually applies now: who is eligible, how the amount is worked out, what counts as your wages, when it must be paid, and when it can be withheld.
Written for whichever chair you are sitting in — reading a payslip, running a payroll, or signing off a balance sheet.
20 minutes with a Growth Advisor on your company’s gratuity liability and how it is funded. No obligation.
Quick answer
Gratuity is a lump sum your employer alone owes you for long service, paid when you leave — on resignation, retirement, termination, death or disablement. The rate is 15 days’ wages for every completed year, with any part-year over six months counting as a full year: divide your last drawn monthly wages by 26, multiply by 15, multiply by your years. You normally need five years of service, or one year on a written fixed-term contract, and no minimum at all if the employment ends in death or disablement. The amount is capped at Rs 20,00,000, and statutory gratuity is normally fully tax-free up to that limit across your lifetime.
Since 21 November 2025 there is one further twist that changes the number for a great many people: your gratuity wage base is now the higher of your basic plus dearness allowance, or half your total monthly pay. Salary structures built on a thin basic and heavy allowances stopped working for gratuity on that date.
What is gratuity?
Gratuity is a statutory terminal benefit: money the law requires an employer to pay an employee for having stayed. It is not a bonus, not goodwill, and not negotiable once you cross the service threshold. It is also not something you contribute to — unlike provident fund, nothing comes out of your monthly salary for it. The whole cost sits with the employer.
Until 21 November 2025 it lived in the Payment of Gratuity Act 1972. That Act was repealed and gratuity moved into Chapter V of the Code on Social Security 2020, sections 53 to 58. The formula and the five-year rule carried over intact. What changed is the definition of the wages you multiply, the eligibility of fixed-term staff, and the paperwork.
Does the law apply to your employer at all?
Yes for factories, mines, oilfields, plantations, ports and railway companies of any size. For shops and establishments, it applies where there are ten or more employees on any day in the preceding twelve months. Below ten, there is no statutory gratuity — anything paid is the employer’s own policy or contract, and it is taxed on a different formula. Many small employers pay anyway.
Who is left outside
Apprentices engaged under the Apprentices Act 1961 are not “employees” for this purpose, though a trainee hired outside that Act is, and does accrue gratuity. Gig and platform workers sit in a separate chapter of the Code with life, disability, health and pension benefits — gratuity is not among them. Contract labour claims from the contractor, not the principal employer, and on the five-year rule rather than the one-year fixed-term rule.
Who is eligible for gratuity?
Five years of continuous service, in most cases. One year if you are on a written fixed-term contract. Three years for working journalists. No minimum at all if the employment ends because of death or disablement due to accident or disease.
| If you are | Service needed | How it is paid |
|---|---|---|
| Permanent staff | 5 years | 15 days’ wages per completed year |
| On a written fixed-term contract | 1 year | Pro rata, on the contract ending |
| A working journalist | 3 years | 15 days’ wages per completed year |
| Leaving through death or disablement | No minimum | Paid to you, or to your nominee or family |
| In a seasonal establishment, not year-round | 5 years | 7 days’ wages for each season |
| Piece-rated or daily-rated | 5 years | Daily wage taken as the average of the last three months |
| Contract labour, through a contractor | 5 years | Claimed from the contractor, not the principal employer |
| An apprentice under the 1961 Act | Not eligible | Not an “employee” for gratuity |
| A gig or platform worker | Not eligible | Separate benefits chapter; gratuity is not one of them |
The five-year clock is more forgiving than it looks
“Continuous service” has a legal meaning of its own. A year counts where you have 240 worked days in it — 190 in mines and in establishments working fewer than six days a week. And several things you might assume are gaps count as days worked: leave with full wages, lay-off under an agreement, absence caused by a work injury, and up to 26 weeks of maternity leave.
Resignation, notice period and probation
Resigning does not forfeit anything. Resignation is a listed exit under section 53(1)(b) — the only test is the service clock. A notice period you actually serve counts, because service runs to your last working day; notice you were paid for in lieu but never served does not. Probation counts too. The law does not distinguish probationers from confirmed staff.
How is gratuity calculated?
Divide your last drawn monthly wages by 26, multiply by 15, and multiply by your completed years of service. Section 53(2) of the Code sets the rate at 15 days’ wages per completed year, with any part-year over six months counting as a full year.
The 26
A working month. The law assumes 26 paid days, not 30.
The 15
Roughly half of that month, for every year you worked.
The years
Completed years, rounding up only when the part-year is over six months.
Three details decide most disputes. “Wages” has a legal meaning, which the next section deals with. “Years” rounds up only when the part-year exceeds six months: 10 years 7 months counts as 11, and 10 years 6 months counts as 10. And the total cannot exceed Rs 20,00,000.
What 15/26 actually adds up to
Put as a proportion, 15/26 is 57.69% of one month’s wages for every year worked, or about 4.81% of your annual wages. Five years of service earns 2.88 months of wages. Ten years earns 5.77 months. Twenty years earns just under a full year’s wages. That last figure reframes gratuity for most people who have only ever thought of it as a small parting gesture.
Worked examples
| Monthly wages | Service | Years counted | Gratuity payable |
|---|---|---|---|
| Rs 25,000 | 4 yrs 7 mths † | 5 | Rs 72,115 |
| Rs 35,000 | 5 yrs 0 mths | 5 | Rs 1,00,962 |
| Rs 50,000 | 7 yrs 8 mths | 8 | Rs 2,30,769 |
| Rs 60,000 | 10 yrs 7 mths | 11 | Rs 3,80,769 |
| Rs 1,20,000 | 18 yrs 3 mths | 18 | Rs 12,46,154 |
| Rs 2,00,000 | 15 yrs 0 mths | 15 | Rs 17,30,769 |
Basis: wages ÷ 26 × 15 × completed years, s.53(2), Code on Social Security 2020. Ceiling Rs 20,00,000. Computed 1 September 2026. Illustrations, not entitlements. † The rounding rule sets the amount once you are eligible; it does not create eligibility. At 4 years 7 months this is payable only where no five-year gate applies — fixed-term, death, disablement — or the 240-days argument succeeds.
Rather put your own salary and dates in than read a table? The free gratuity calculator applies all of this to your figures, shows which wage base it used and why, and has a second tab that works out a whole company’s liability. Nothing is sent to us, and no email is needed.
Open the calculatorWhich parts of my salary count for gratuity?
Basic pay, dearness allowance and retaining allowance count. HRA, conveyance, overtime, commission, statutory bonus, employer provident fund and the value of amenities do not — unless together they exceed half your total pay, in which case the excess is added back. In practice: your gratuity base is the higher of your basic plus DA, or half your total pay.
This is the change that matters most, and the one nearly every calculator online still gets wrong. The Code’s definition of wages, section 2(88), lists eleven excluded items and then adds a rule with teeth: where the excluded items under heads (a) to (i) exceed one-half of all remuneration, the excess is deemed to be wages. Work the algebra through and it lands in a single line — the gratuity base cannot fall below 50% of total remuneration.
The Ministry of Labour’s own FAQs, issued 16 March 2026, confirm the edges: only section 2(88) components count for gratuity, annual performance incentives are not wages, and gratuity itself and other retirement benefits stay out of the 50% test.
What the change costs an employer
| If the old gratuity base was this share of total pay | The wage change raises the liability by |
|---|---|
| 30% | 66.7% |
| 35% | 42.9% |
| 40% | 25.0% |
| 45% | 11.1% |
| 48% | 4.2% |
| 50% or more | 0% — already at the floor |
Uplift = (50% of total remuneration ÷ old base) − 1. Basis: s.2(88) deeming proviso, Code on Social Security 2020. Wage base only, before discounting, attrition or salary projection. Computed 1 September 2026.
Two companies paying identical salaries can carry gratuity liabilities a third apart, purely from how the payslip was split.
Is 4 years 7 months enough for gratuity?
On the plain words, no — the Code requires five years. But 4 years and 240 worked days is arguable, and in Tamil Nadu and Kerala the High Courts have held it is enough. Elsewhere it is a strong argument rather than a settled entitlement. The Supreme Court has not ruled.
The argument runs through the deeming provision: if 240 worked days count as a year, then 240 days into the fifth year completes it. The Madras High Court accepted this in Mettur Beardsell (1998); the Kerala High Court in Sreeja B. (2015). Controlling authorities in those two states are bound by those rulings. A claim elsewhere can cite both, persuasively rather than conclusively.
Be wary of anything that flatly states “4 years 240 days is now the rule under the Code”. No court has yet applied the Code’s section 54 to the question. For a national employer, the practical consequence is uncomfortable but simple: one uniform exit rule is either generous somewhere or exposed in these two states.
Is gratuity taxable in India?
Statutory gratuity is normally fully tax-free, because the exemption is calculated on the same formula that produces the entitlement. Anything your employer pays above the statutory amount is taxable. Government employees are exempt without limit. The cap for everyone else is Rs 20 lakh — across your lifetime, not per job.
One correction to most of what you will read elsewhere. From 1 April 2026 the exemption no longer lives in “section 10(10)”. The Income-tax Act 2025 moved it into the salary rules themselves — the section 19(1) Table, serial numbers 3 to 6 — with Schedule III, serial 38, covering gratuity paid to a family on an employee’s death, which is exempt in the family’s hands.
| Who you are | What is exempt | Where it sits |
|---|---|---|
| Government employee | The entire amount | s.19(1) Table, Sl. 3 |
| Defence services, under the Pension Code | The entire amount | Sl. 4 |
| Covered by the gratuity law (10+ employees) | The statutory 15-days formula, up to the notified ceiling of Rs 20 lakh | Sl. 5 |
| Not covered (employer under 10 staff) | Least of: amount received · Rs 20 lakh · ½ × average salary of the last 10 months × completed years | Sl. 6 |
The Rs 20 lakh limit is the 2019 notification carried forward, and it is a lifetime aggregate across all employers.
Two consequences worth knowing
- The under-ten formula is always 13.3% worse. It uses one-half instead of 15/26. An employee of a nine-person firm with Rs 50,000 average salary and ten completed years gets Rs 2,50,000 of exemption, against Rs 2,88,462 for the identical person in a ten-person firm.
- If a lump sum pushes you into a higher slab, section 157 gives relief for amounts received in arrears, claimed on Form 39.
Is gratuity still tax-free under the new tax regime?
Yes. The exemption sits inside the salary computation itself, not among the deductions the new regime removed, so your choice of regime does not touch it. And ignore the “Rs 5 lakh gratuity exemption circular” being shared around — no such CBDT circular could be found, and the Rs 20 lakh position stands.
When must my employer pay?
Within thirty days of gratuity becoming payable, under section 56(3). The employer must work out the amount and give you notice whether or not you apply. Simple interest runs on delay under section 56(4). Failing to pay gratuity is an offence under section 133 of the Code: up to one year’s imprisonment, a fine up to Rs 50,000, or both.
Will gratuity come in my full and final settlement? Often, but it is not an FnF line the employer may hold back against notice-period recoveries or a pending clearance. It is a separate statutory payment on its own thirty-day clock, payable whether or not you apply for it.
On interest: the rate notified before the Code was 10% a year simple, and the courts have enforced it. A fresh rate under the Code is awaited — take the current figure from the authority handling your case.
How to claim gratuity, if it goes wrong
Most of the time nothing here is needed: the employer computes the amount and pays it. This is the route if they do not.
- File your nomination first, long before any of this. Due after completing one year of service, ordinarily within 90 days. It is the form that matters most on the worst day, and the one people forget to update after marriage.
- Apply in writing. Form IV under the 2026 Central Rules, ordinarily within thirty days of leaving. Legal heirs have a year. A late application does not kill the claim.
- The employer must answer within fifteen days. Form V, admitting or rejecting, with reasons. Keep the acknowledgement of everything you send.
- If it is disputed, go to the competent authority. The employer must deposit the amount it admits while the dispute runs, so a partial dispute does not hold up the undisputed part.
- Appeals go up within sixty days. Interest on the delayed amount runs alongside, under section 56(4).
Form numbers and the nomination window are as reported and are being verified against the gazette. Single-state employers may still be on their own state’s older forms, where the numbering differs.
Can my employer refuse to pay gratuity?
Only in narrow cases, and never silently. Where your proven misconduct caused the employer damage or loss, gratuity is forfeited to the extent of that loss. For riotous or violent conduct, or an offence involving moral turpitude at work, it can be forfeited wholly or partly — after a fair hearing. Refusal without a forfeiture order is simply non-payment.
Those are two different gateways in section 53(6), and the Supreme Court has policed both recently. In February 2025, in Western Coal Fields v. Fulzele, it held that a criminal conviction is not required for moral-turpitude forfeiture — a fair disciplinary finding can do — but the discretion must be exercised proportionately. In July 2026, in Prabhat Kumar Singh v. Accu Pack Engineering, it rejected a claimed Rs 50 lakh loss backed by no audit report and no calculation: the loss must be proved by independent evidence, and forfeiture is limited to what is proved.
The two look like they pull in opposite directions. They do not. One is about the standard of proof for misconduct; the other about the quantum of loss.
The questions a payslip creates
Is gratuity part of my CTC, and do I lose it if I leave early?
Many offer letters count a gratuity accrual inside CTC. Showing it there does not create a right to it before the law does: leave before the threshold and it is not payable, whatever the CTC sheet said. It does not work the other way either — an employer cannot deduct gratuity from your monthly pay and call it recovered. If yours was shown in CTC, treat it as the employer pre-funding a legal obligation, not as deferred salary you can encash early.
Does gratuity transfer when I change jobs?
No. Leave at four years, join elsewhere, and both clocks read zero. Nothing carries over and the old employer owes nothing. The exception is a transfer within the same employer, or to its successor on a business transfer, where service usually continues. The Rs 20 lakh tax-free limit, though, is a lifetime total across every employer you have had.
Who can I nominate?
File the nomination after one year of service and keep it current. Where you have a family, the rules require the nomination to be in favour of family members — a nomination to anyone else while family exists does not hold.
How is gratuity different from provident fund?
| Gratuity | Provident fund | |
|---|---|---|
| Who pays | The employer alone | You and your employer, monthly |
| When you get it | On leaving, after the service threshold | A corpus that builds monthly; withdrawal and pension per EPFO rules |
| How much | 15 days’ wages per year of service | Contributions plus declared interest on your balance |
| Changing jobs | Does not transfer. Each clock runs separately | Follows you, on one UAN |
Provident fund sits under the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, which the labour codes did not repeal. Gratuity sits in Chapter V of the Code on Social Security 2020.
For employers: past service and future service
Past service gratuity is what your people have already earned — every year already worked, valued today, sitting on your balance sheet whether funded or not. Future service gratuity is what they will earn from today onward, arriving one year at a time. An insurer or actuary prices the two separately, and funds them differently.
Take a company eleven years old that has never set a rupee aside. The whole eleven-year backlog is past service, funded with a single initial contribution — historically allowed in up to five annual instalments under a 1969 CBDT concession; ask your tax adviser to confirm its position under the 2025 Act. Everything from here on is future service, funded by an ordinary annual contribution that keeps pace with each year’s fresh accrual.
| Past service | Future service | |
|---|---|---|
| Covers | Years already worked, up to the day the fund starts | Years worked from that day onward |
| On the balance sheet today? | Yes — the whole of it, as the defined benefit obligation | No. It arrives yearly as current service cost |
| Funded by | An initial contribution, single or in instalments | An ordinary annual contribution, every year |
| Tax-deductible up to | 8⅓% of salary × each year of past service (Rule 322) | 8⅓% of salary, each year (Rule 321) |
| If you skip it | The backlog compounds and lands as lumpy cash on senior exits | This year’s accrual joins the backlog |
Tax references: Income-tax Act 2025 and Income-tax Rules 2026 (G.S.R. 198(E), 20 March 2026). “Salary” for both caps is basic plus DA only — not CTC, and not the Code’s “wages”. The five-instalment concession is under verification.
The distinction that trips up almost everyone
Past service liability and past service cost are different things. The liability is a funding idea: the accrued obligation on the day you start a fund. Starting a fund creates no expense — it creates a plan asset. Past service cost is an accounting idea, defined in Ind AS 19 para 102 as the change in the obligation caused by amending the plan. Starting a fund is not a plan amendment. Changing the benefit formula is, and that is exactly what the labour codes did on 21 November 2025.
Which is why the increase had to hit the profit and loss account at once rather than being spread. ICAI’s Accounting Standards Board said so in December 2025: a plan amendment, recognised immediately under Ind AS 19 para 103, first landing in the quarter ended 31 December 2025. The Institute of Actuaries of India, on 27 January 2026, went further and shut the side door — the increase is not an actuarial loss to be parked in other comprehensive income, even where salaries were restructured to comply. Under AS 15, only the vested part hits at once and the unvested part spreads to vesting.
What funding changes, and what it does not
- It changes the tax timing. A provision is not deductible (s.29(2)(a) of the 2025 Act); a sum actually paid to an approved fund under an irrevocable trust is (s.29(1)(c)).
- It changes the cash profile. A lumpy, exit-driven outflow becomes a planned contribution, and the fund’s own earnings build up tax-free.
- It does not change who owes the money. If premiums or contributions stop, the employer owes the gratuity forthwith under section 57(5). Funding offsets the obligation; it never reduces it.
- It does not change the accounting character. An insured plan stays a defined benefit plan unless the insurer takes over the obligation itself, which a group gratuity accumulation scheme does not.
One structural point nobody says out loud: the obligation is discounted at government bond yields while the fund earns the insurer’s declared rate, so even a fully funded scheme drifts into surplus or deficit from that spread alone. Funding removes cash-timing risk, not balance-sheet movement.
The mechanics, briefly
An irrevocable trust with at least two resident trustees, approval applied for online in Form 188, and not a rupee may ever return to the employer (Rule 324). The trust’s money may be placed in a group gratuity scheme with an insurer — expressly permitted under Rule 318, and the simplest compliant route. IRDAI requires such schemes to carry life cover with an explicit mortality charge, and requires the trustees to confirm the funding is needed per the accounting standard. A gratuity policy cannot be used as an investment parking spot.
Recognising a liability and funding it are two different decisions.
Two things worth doing this quarter
- Ask payroll one question in writing: what wage base did we use for gratuity from 21 November 2025? If the answer is “basic plus DA”, the uplift table above is your exposure.
- Ask your actuary for the split at 21 November 2025 — the past service cost from the law change, separated from ordinary movement. The actuarial institute expects that split to be shown.
Want the number before the conversation? The employer tab of the gratuity calculator takes headcount bands or a salary census, computes the accrued liability, the uplift against your old base, the vested split, next year’s fresh accrual and the Rule 321 and 322 ceilings. The census is read in your browser and is not sent to us.
Work out our liabilityDoes gratuity law differ by state?
The entitlement — the formula, the five years, the ceiling — is national and identical everywhere. What differs by state is which rulebook supplies your forms, one contested insurance obligation in three southern states, two surviving state statutes in Kerala and Assam, and one judicial split on the 4-years-240-days question.
Before the table, one test that does most of the work. If your company has branches in more than one state, your “appropriate Government” is the Centre under section 2(3): the Central Rules 2026 govern your gratuity paperwork everywhere, and on the published professional reading the state insurance rules below never applied to you at all. A single-state company, including a single-state subsidiary of a multi-state group, follows its state.
| State | What is different | Status |
|---|---|---|
| Karnataka | Compulsory Gratuity Insurance Rules 2024: insure the liability with a life insurer, or run an approved gratuity fund. Registration, employee lists and renewal intimations to the Controlling Authority. | Contested — under High Court challenge, with an April 2025 interim order barring coercive action. Whether the Rules survived the repeal of the 1972 Act is unresolved. |
| Andhra Pradesh | Compulsory Gratuity Insurance Rules 2011, the original of the Karnataka model, with an exemption for employers of 500 or more running an approved fund. | Nominally in force for single-state employers; little enforcement evidence. |
| Telangana | Understood to continue the AP 2011 Rules from the 2014 bifurcation. | Unverified — no separate Telangana notification could be confirmed. |
| Kerala | Its own 1970 state gratuity Act survives, with a ceiling of fifteen months’ wages, reaching some shops, plantations, beedi and motor-transport establishments. Small transport operators fall into a welfare-fund scheme instead. | State Act in force; central law prevails where they conflict. A claimed compulsory-insurance notification could not be verified. |
| Assam | The Assam Gratuity Act 1992 applies its own scheme to tea factories and plantations — the one genuinely different formula in the country. | In force for tea; a 2023 amendment on the 240-day year is pending confirmation. |
| Gujarat | Notified its Code rules: fixed-term eligibility corrected to one year, and the gratuity nomination form replaced, so old nominations may need re-signing with witnesses. | Notified, February 2026. Verified against the gazette. |
| Odisha | Draft Code rules already contain the machinery for compulsory insurance registration — the first state visibly preparing for section 57. | Draft only. Does not switch the obligation on. |
| Tamil Nadu and Kerala (courts) | Not different law but different outcomes. Both High Courts treat 4 years plus 240 worked days as five years, and their controlling authorities are bound. | Live. One national exit rule is either generous elsewhere or exposed here. |
| Everywhere else | No compulsory gratuity insurance requirement found; the standard Code position applies. Forms may still follow the older state rules until that state notifies its own. | Checked: Maharashtra, Delhi, Haryana, UP, West Bengal, Rajasthan, MP, Punjab, Tamil Nadu. |
Position as at 1 September 2026, re-swept 8 September 2026 with no change found. “Contested” and “unverified” mean exactly that — this table says so rather than guessing. A negative finding is not proof of absence.
The deadlines to pin to the HR wall
| Step | Deadline | Form |
|---|---|---|
| Nomination, after one year of service | ordinarily within 90 days | Form III |
| Employer verifies and returns a copy | within 30 days | — |
| Employee or nominee applies | ordinarily within 30 days; legal heirs, one year | Form IV |
| Employer’s notice admitting or rejecting | within 15 days of the application | Form V |
| Payment, by bank transfer or demand draft | within 30 days | — |
| Annual unified return | by 28 or 29 February | Form XXIII |
Social Security (Central) Rules 2026, G.S.R. 344(E), 8 May 2026. Form numbers shown as reported and under verification. Single-state employers should confirm their own state’s forms, which can differ — the Centre uses Form III for nomination while Gujarat uses Form IV, so one group-wide template is wrong somewhere.
What changed in India’s gratuity rules?
Three dates. On 21 November 2025 the Payment of Gratuity Act 1972 was repealed and gratuity moved into the Code on Social Security 2020: same formula, wider wage base, one-year eligibility for fixed-term staff. On 8 May 2026 new Central Rules replaced the 1972 forms. On 1 April 2026 the Income-tax Act 2025 renumbered the exemption.
What did not change matters as much. The 15/26 formula, the five-year rule for permanent staff and the Rs 20 lakh ceiling all carried over untouched. The quiet change is constitutional rather than arithmetical: the rate, the ceiling and even compulsory gratuity insurance are now switches the government can flip by notification, without amending the law.
When one of those flips, this page changes with it. The date at the top tells you when it was last checked.
Re-swept 8 September 2026: no section 57 insurance notification from the Centre or any state, no change to the Rs 20 lakh ceiling, no new final state rules, and no gratuity judgment after Accu Pack on 28 July 2026.
ग्रेच्युटी क्या होती है?
ग्रेच्युटी वह रक़म है जो कंपनी लंबी सेवा के बदले देती है — नौकरी छोड़ने, रिटायर होने, या मृत्यु की स्थिति में परिवार को। हिसाब आसान है: आख़िरी महीने की मज़दूरी ÷ 26 × 15 × सेवा के पूरे साल।
ज़्यादातर कर्मचारियों के लिए पाँच साल की सेवा ज़रूरी है; लिखित फिक्स्ड-टर्म कॉन्ट्रैक्ट पर एक साल काफ़ी है। 21 नवंबर 2025 से मज़दूरी का आधार बदल गया है — अब आपका बेसिक और डीए, या कुल वेतन का आधा, इनमें से जो ज़्यादा हो वही लागू होता है। हमारा मुफ़्त ग्रेच्युटी कैलकुलेटर यही हिसाब आपके लिए करता है।
Why work with a broker on gratuity?
Gratuity funding is one of the few places where the number, the structure, the product and the compliance all have to agree with each other — and they are usually decided by four different people in four different months. A broker’s job is to make it one conversation.
By law a broker represents you, not the insurance company. On group gratuity that matters in four specific places.
- The number. We coordinate the actuarial valuation with an independent actuary, including the 21 November 2025 split your auditor will ask for, so the figure you fund is the figure you report.
- The structure. The honest trade-offs between a trust and an insurer scheme, with the tax ceilings under Rules 321 and 322 applied to your own census — settled on paper before any product enters the room.
- The placement. Group gratuity scheme quotes from across the market with the differences marked: declared rates, charges, exit terms. Never a single pre-picked name.
- The upkeep. Annual re-valuation, contribution checks against fresh accrual, and a watch on the notifications that change this page — your states’ rules and the section 57 switch — so you hear it from us first.
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Ethika-wide figures, per Fixed Facts as at 21 August 2026.
Common myths about gratuity
Gratuity attracts more confidently wrong information than almost any other benefit in India, partly because the law moved recently and partly because a fabricated tax circular is still doing the rounds. These are the ones we end up correcting most often, each checked against the primary source.
- Myth“Gratuity insurance is now compulsory nationwide.”FactSection 57 takes effect only from a date the government notifies. No such date has been notified, by the Centre or by any state.
- Myth“The labour codes cap allowances at 50%.”FactWrong mechanism. Nothing is capped. Where the excluded items exceed half of total pay, the excess is deemed to be wages — which raises the gratuity base rather than restricting the payslip.
- Myth“The gratuity exemption still sits in section 10(10).”FactNot since 1 April 2026. It is the section 19(1) Table, serial numbers 3 to 6, of the Income-tax Act 2025.
- Myth“The exemption is in Schedule II of the new Act.”FactSchedule II has no gratuity entry. Schedule III, serial 38, covers death cases only.
- Myth“CBDT Circular 06/2025 gives a Rs 5 lakh gratuity exemption.”FactNo such circular could be found. Treat it as fabricated. The Rs 20 lakh position stands.
- Myth“The past-service funding cap is 8⅛%.”FactIt is 8⅓% — one twelfth, exactly one month’s salary. 8⅛ is a scanning error that spread.
- Myth“The ceiling is now Rs 25 lakh.”FactRs 25 lakh is for Central Government employees, from 1 January 2024. Everyone else, including public-sector enterprises, remains at Rs 20 lakh.
- Myth“4 years and 240 days is now the rule.”FactA strong argument, binding on controlling authorities in Tamil Nadu and Kerala. Not a settled national entitlement, and the Supreme Court has not ruled.
- Myth“Funding the gratuity moves it off our books.”FactFunding creates an offsetting asset. The obligation is unchanged and stays the employer’s, under section 57(5).
- Myth“A Rs 75 lakh gratuity ceiling is coming.”FactA wishlist, not a decision. Staff-side proposals to the 8th Pay Commission ask for Rs 50 to 75 lakh, for central government employees only. Nothing is notified, and it would not touch the private-sector Rs 20 lakh either way.
Key terms, explained
Gratuity comes with a vocabulary that belongs half to labour law and half to accounting. Here is the plain-English version of the words you will meet.
- Wages (section 2(88))
- The legal definition you multiply. Basic pay, dearness allowance and retaining allowance, plus anything not on the exclusion list — and never less than half your total remuneration.
- Continuous service
- Service counted for the five-year test. A year needs 240 worked days, and paid leave, agreed lay-off, work-injury absence and up to 26 weeks of maternity leave count as worked.
- Completed year of service
- A full year, plus any part-year over six months. Exactly six months does not round up.
- The ceiling
- The maximum gratuity payable, currently Rs 20,00,000. It is set by notification, not written into the statute.
- Fixed-term employee
- Someone directly employed on a written contract with a defined end date. Entitled to pro rata gratuity after one year, not five.
- Forfeiture
- The narrow power to withhold gratuity for proven damage to employer property, or for riotous conduct or moral turpitude at work. It requires an order, not silence.
- Defined benefit obligation
- The actuarial value of gratuity already earned by your staff, computed by the projected unit credit method and discounted at government bond yields. The number that goes in your accounts.
- Past service liability
- A funding idea: the whole accrued obligation on the day you start a fund. Not an expense.
- Past service cost
- An accounting idea: the change in the obligation caused by amending the plan. The 21 November 2025 wage change was one, and hit the profit and loss account immediately.
- Approved gratuity fund
- An irrevocable trust approved by the tax authority, into which contributions are deductible and out of which no money may return to the employer.
- Group gratuity scheme
- An insurer product the trust may invest in, expressly permitted, carrying life cover with a stated mortality charge.
- Appropriate Government
- Which rulebook governs you. The Centre for multi-state establishments, and for mines, ports, banking, insurance and public-sector undertakings; otherwise the state.
Common questions
How is gratuity calculated?
How many years do I need?
Can I get gratuity if I resign?
Does my notice period count?
Is 4 years 7 months enough?
Which parts of my salary count?
Is gratuity taxable?
Is it still tax-free under the new regime?
When must my employer pay?
Can my employer refuse to pay?
Does gratuity transfer when I change jobs?
Is gratuity part of my CTC?
Is gratuity insurance compulsory?
My employer has fewer than 10 staff. Do I get gratuity?
How do we work out our company’s liability?
Go deeper: plain-English explainers
Longer reads on gratuity, written to be useful on their own. Still general; where the honest answer is “it depends on your state or your policy,” they say so.
- Gratuity calculator: your amount, or your company’s liabilityTool
- What is gratuity, and who is eligible?
- Is gratuity taxable? The position after 1 April 2026
- The five-year rule, and the exceptions to it
- What counts as wages for gratuity under the labour codes
- Funding gratuity: trust or insurer scheme?
- Gratuity rules state by state, including compulsory insurance
Recognising the liability is one decision. Funding it is another.
Everything above is how gratuity works in general. What it means for your company depends on how your payslips are split, how long your people stay, which states you operate in and how much lumpy cash you can absorb on a senior exit — and that is a short conversation, not a form filled in blind.
If your auditor has just asked about the 21 November 2025 split, if you are setting up a fund for the first time, if you are reviewing an existing trust, or if you simply want to know what the number is before anyone else asks you for it, that is the moment to talk.
What happens when you talk to us
A 20-minute video call with a Growth Advisor — no obligation, and no hard sell. In that first call we usually look at:
- Your wage structure, and what the new definition did to your base
- The accrued number, and what an actuary will need to firm it up
- Trust or insurer scheme, and the tax ceilings that apply to each
- Which of your states carry a compliance question worth checking
You will leave with an honest read on where you stand, and a straight answer on whether we can genuinely help.
20 minutes with a Growth Advisor. No obligation.
Gratuity calculator · Group health insurance · Group term life insurance · Group personal accident insurance
A note on this page. This page is general information about gratuity as a statutory entitlement — not legal, tax, actuarial or financial advice, and nothing on it is an offer of insurance. Figures reflect the law as at the review date above, and several items on this page are switches the government can change by notification. Your own position should be confirmed with your adviser, your actuary and the authority handling your case.
Sources. Code on Social Security 2020, Chapter V (ss.53 to 58), s.2(88), s.57, s.133; commencement S.O. 5319(E) of 21 November 2025. Social Security (Central) Rules 2026, G.S.R. 344(E) of 8 May 2026. Ministry of Labour and Employment, Additional FAQs on the Labour Codes, 16 March 2026. PIB factsheet, 22 November 2025. Gratuity ceiling notification S.O. 1420(E) of 29 March 2018; Central Government Rs 25 lakh per DoPPW with effect from 1 January 2024. Income-tax Act 2025 (s.19(1) Table Sl. 3 to 6, s.29, s.157, Schedule III Sl. 38, Schedule XI) and Income-tax Rules 2026, G.S.R. 198(E) of 20 March 2026, Rules 317 to 329; CBDT Circular 14 of 23 April 1969. ICAI Accounting Standards Board FAQs, December 2025; Institute of Actuaries of India advisory, 27 January 2026; Ind AS 19; AS 15 (Revised 2005). IRDAI Master Circular on Life Insurance Products, 12 June 2024. State instruments: Karnataka Compulsory Gratuity Insurance Rules 2024; Andhra Pradesh Compulsory Gratuity Insurance Rules 2011; Kerala Industrial Employees’ Payment of Gratuity Act 1970; Assam Gratuity Act 1992; Code on Social Security (Gujarat) (Amendment) Rules 2026. Courts: Western Coal Fields v. Fulzele, 2025 INSC 233; Prabhat Kumar Singh v. Accu Pack Engineering, 28 July 2026; Mettur Beardsell (Madras, 1998); Sreeja B. (Kerala, 2015). Ethika-wide figures per Fixed Facts, 21 August 2026. Verified 1 September 2026, re-swept 8 September 2026.