Gratuity Eligibility Rules in India 2026 — Who Qualifies and When

Gratuity is a lump-sum payment your employer is legally required to pay when you leave a job after a minimum period of continuous service, governed by the Payment of Gratuity Act, 1972. Many employees assume gratuity is automatic on resignation, but eligibility actually depends on specific conditions that are worth understanding before you plan a job change.

The Five-Year Rule

The single most important eligibility condition is that you must complete at least five years of continuous service with the same employer. This applies whether you resign, retire, or are terminated for reasons other than misconduct. Service of four years and 240 days or more in the fifth year is generally treated as having completed five years under most interpretations, though this has been subject to differing judicial views.

Exceptions to the Five-Year Rule

The five-year requirement is waived in specific circumstances.

• Death of the employee, regardless of years served
• Disablement due to accident or disease, regardless of years served

In both these cases, gratuity becomes payable to the employee or their nominee even if the five-year threshold was not met.

Which Employers Are Covered

The Payment of Gratuity Act applies to any establishment employing 10 or more people, including factories, mines, oilfields, plantations, ports, railways, shops, and other establishments. Once an establishment becomes covered under the Act, it continues to be covered even if the employee count later falls below 10.

What Counts as Continuous Service

Continuous service does not mean you can never take a break. Service is considered continuous even if interrupted by sickness, accident, authorised leave, absence without leave that does not break service under standing orders, layoff, strike, or a lockout that is not the employee's fault. However, unauthorised absence or a gap due to resignation and rejoining as a fresh hire generally resets the service period.

How Gratuity Is Calculated

For employees covered under the Act, gratuity is calculated using the formula: (Last drawn basic salary plus dearness allowance) multiplied by 15, multiplied by number of years of service, divided by 26. The number 26 represents the working days considered in a month under the Act, and 15 represents 15 days of wages for every completed year of service.

Tax-Free Limit on Gratuity

Gratuity received by government employees is fully exempt from income tax. For employees in the private sector covered under the Act, gratuity is tax-free up to ₹20 lakh over your lifetime across all employers. Any amount received beyond this lifetime limit is taxable as per your applicable income tax slab.

What Happens If You Resign Before Five Years

If you resign before completing five years of continuous service and none of the exceptions apply, you generally forfeit your right to gratuity entirely under the Act. Some employers, especially larger companies, may offer a discretionary gratuity-like benefit even before five years as part of their HR policy, but this is not a legal entitlement and varies entirely by company.

Planning Your Job Change Around Gratuity

If you are close to completing five years and considering a job change, it is worth calculating whether waiting a few additional months to cross the threshold makes financial sense, particularly for employees with a high basic salary where the gratuity amount can be substantial. Use the gratuity calculator to see exactly how much you would be entitled to at different service lengths before making this decision.

Frequently Asked Questions

Is gratuity paid even if I am terminated for poor performance?

Yes, gratuity remains payable for termination due to poor performance, provided you have completed the required years of continuous service. Gratuity forfeiture under the Act is specifically restricted to cases involving proven misconduct, such as moral turpitude or acts causing financial loss to the employer, not ordinary performance issues.

Can my employer delay paying my gratuity?

No, the Act requires gratuity to be paid within 30 days of it becoming payable. Employers who delay beyond this period are liable to pay interest on the delayed amount, and employees can file a complaint with the labour authorities if payment is unreasonably withheld.