Gratuity
Written in plain language to promote general understanding. This is educational information, not legal advice. Based on Indian central (Union) law — Constitution of India, central Acts of Parliament, and Supreme Court decisions.
Indian Central Law
What is this right?
Gratuity is a statutory terminal benefit payable by an employer to an employee who has completed at least five years of continuous service.
- Eligibility: Any employee (factory worker, plantation worker, mine worker, oilfield employee, port employee, or employee of an establishment with 10+ workers) who has completed 5 years of continuous service.
- If an employee dies or is permanently disabled, gratuity is payable even if 5 years have not been completed.
- Formula: (Last drawn basic salary + DA) × 15/26 × Number of completed years of service. Each year beyond 6 months counts as a full year; fractions below 6 months are ignored.
- Tax exemption: Gratuity up to ₹20 lakh is fully exempt from income tax for non-government employees (s. 10(10), Income Tax Act).
- Gratuity must be paid within 30 days of it becoming payable. Delays attract compound interest at the rate prescribed by the Central Government.
When does it apply?
- You resign, retire, or are retrenched after completing 5 years of continuous service with the same employer.
- You die or become permanently disabled while in service (5-year rule does not apply in these cases).
- Your employer refuses to pay or calculates gratuity at a lower amount than due.
What should you do?
- Submit Form I (Notice of Claim) to your employer within 30 days of gratuity becoming payable (or after death/disability, by your nominee/legal heir).
- Your employer must respond with Form L (Notice of Payment) within 15 days, specifying the amount and date of payment.
- If the employer refuses or pays less, file an application before the Controlling Authority (typically the Labour Commissioner) under s. 7 of the Act — the Controlling Authority can direct payment plus 10% per annum interest on delayed amounts.
- Appeals against the Controlling Authority's order lie to the Appellate Authority (within 60 days).
What should you NOT do?
- Do not resign just before completing 5 years without calculating whether gratuity is due — service just past the 4-year 6-month mark (treated as 5 full years) can trigger entitlement.
- Do not forfeit gratuity by committing an act of wilful omission or negligence causing loss/damage — gratuity can be forfeited wholly or partially in such cases (s. 4(6)).
- Do not accept a private settlement for less than the statutory amount without consulting a labour lawyer first.
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