What Is Gratuity? Meaning, Rules, and Latest Changes Explained Simply

What Is Gratuity? Meaning, Rules, Eligibility & Upcoming Changes Explained

Author: @nkit

Gratuity is an important employee benefit in India, but it is often misunderstood. Many employees only hear about gratuity when they resign, retire, or switch jobs. Knowing how gratuity works — and how the rules may change in the future — helps you plan your career and finances better.

What Is Gratuity?

Gratuity is a one-time lump-sum amount paid by an employer to an employee as a reward for long and continuous service. It is governed by the Payment of Gratuity Act, 1972, which currently applies across India.

In simple terms, gratuity is a financial “thank you” from the employer for staying with the organisation for many years.

Who Is Eligible for Gratuity (As Per Current Law)?

As per the law that is currently in force:

• An employee becomes eligible for gratuity after completing 5 years of continuous service with the same employer
• The 5-year condition is not required in case of death or permanent disability
• The law applies to establishments with 10 or more employees

This 5-year rule continues to apply to most permanent employees as of today.

When Is Gratuity Paid?

Gratuity is usually paid when an employee leaves the organisation due to:

• Retirement or superannuation
• Resignation (after eligibility is met)
• Death (paid to nominee or legal heir)
• Permanent disability due to illness or accident

How Is Gratuity Calculated?

For employees covered under the Payment of Gratuity Act, the calculation formula is:

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

Here, last drawn salary includes Basic Salary + Dearness Allowance (DA).

Example

If your last drawn salary is ₹30,000 and you have worked for 7 years:

Gratuity = (30,000 × 15 × 7) ÷ 26 ≈ ₹1,21,154

Is Gratuity Tax-Free?

• Gratuity received by government employees is fully tax-free
• For private-sector employees, gratuity is tax-free up to ₹20 lakh
• Any amount above ₹20 lakh is taxable as per income-tax rules

Important Note on New & Upcoming Gratuity Rules

The government has introduced new Labour Codes, including changes related to gratuity. However, these changes are being implemented in phases and depend on state-level notifications.

To avoid confusion, here is the clear picture:

• The 5-year rule remains applicable for most permanent employees as long as the current Act continues
• Fixed-term employees may become eligible for gratuity even with shorter service, as per new Labour Code provisions
• Once fully implemented, definitions of wages may change, which can impact gratuity calculation amounts

Until official notifications are enforced nationwide, employees should rely on the existing 5-year eligibility rule.

Why This Clarity Matters

Many employees resign just a few months before completing 5 years, not realising they are close to gratuity eligibility. Understanding both current and future rules helps you make smarter career decisions.

Practical Tips for Employees

• Track your joining date carefully
• Understand your salary breakup (Basic + DA)
• Nominate a family member for gratuity
• Keep appointment letters and salary slips safe

Frequently Asked Questions (FAQ)

Q1. Is gratuity after 1 year applicable to everyone?

No. The 1-year eligibility applies mainly to fixed-term employees under upcoming Labour Code provisions. Permanent employees still follow the 5-year rule unless officially changed.

Q2. Can gratuity be denied by the employer?

Gratuity is a legal right. However, it can be partially or fully forfeited in cases of serious misconduct or financial loss caused to the employer.

Q3. What happens if my employer delays gratuity payment?

Employers are required to pay gratuity within 30 days. Delays may attract interest penalties.

Q4. Does changing companies reset gratuity?

Yes. Gratuity is calculated separately for each employer. Changing jobs resets the service period.

Q5. Should I rely on future rules while planning?

No. Always plan based on current law. Future rules should be considered only after official implementation.

Final Thoughts

Gratuity is not a bonus — it is a statutory benefit earned through service. While new labour reforms aim to improve employee benefits, understanding the rules that apply today protects you from misinformation and poor financial decisions.

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⚠️ This content is for educational purposes only. Please do your own research before making any financial decisions.