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Gratuity

What Is Gratuity?

Gratuity is a statutory benefit awarded by employers to employees as a token of gratitude for long-term and dedicated service. In India, under the Payment of Gratuity Act, 1972, employees with a minimum of five years of continuous service are eligible to receive gratuity upon leaving the organisation due to resignation, retirement, or termination (subject to certain conditions).

It represents a lump-sum payment calculated based on the employee’s last drawn salary and length of service.

How Is Gratuity Calculated?

• Gratuity is calculated according to the formula
• (Last drawn salary × 15/26) × Number of years of service
• Where “last drawn salary” includes basic pay and dearness allowance, and service is rounded appropriately after six months. For example, someone with 10 years of service would be eligible for 10 months of gratuity pay.

Who Is Eligible for Gratuity?

Employees qualify for gratuity if:

• They have worked for the same organisation for five or more years
• They exit due to retirement, resignation (after five years), or termination (except for disciplinary cause)
• In certain cases of disability or death, gratuity may be paid even if continuous service is less than five years

The entitlement applies mostly to organisations with 10 or more employees or as specified under state regulations.

Why Is Gratuity Important?

Gratuity serves multiple purposes:

• Acts as a financial cushion post-employment
• Recognises long-term loyalty and contribution
• Is statutory—non-payment can lead to legal action
• Encourages employee retention and morale, knowing that service is valued

For employers, it demonstrates compliance and care towards employee welfare.

How and When Is Gratuity Paid?

Upon an employee's exit, either through retirement or resignation, the employer must initiate the gratuity claim process. The employee must submit a claim using Form F to the regional EPFO office or submit relevant documentation via the EPFO member portal. Employers are required to pay the gratuity within 30 days of receipt of the claim.

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If the employer defaults, interest is payable to the employee until it is settled.