Plain-English guide to the Payment of Gratuity Act, 1972 — eligibility, formula, ₹20 lakh tax cap, payment timeline, nomination process, forfeiture, dispute resolution, and interaction with EPF/EPS. Updated May 2026.
Eligibility: 5 years continuous service (waived for death/disability)
Formula: (last basic + DA) × 15/26 × years of service
Tax-free up to ₹20 lakh lifetime cap under Section 10(10)
Year rounding: ≥ 6 months in final year rounds UP
Payable within 30 days; delay accrues interest at ~10% p.a.
Death gratuity is fully tax-free to nominee regardless of amount
Government / PSU employees: gratuity is fully tax-free (no cap)
Topic-wise breakdown
Topic 1 of 10
What is gratuity?
A lump-sum payment from your employer in recognition of long service — paid on retirement, resignation, termination, death, or permanent disability. Governed by the Payment of Gratuity Act, 1972.
Key points
Statutory benefit — your employer cannot opt out if covered by the Act
Applies to factories, mines, plantations, ports, railways, shops & establishments with 10+ employees
Continues to apply even if employee count drops below 10 after coverage starts
Voluntary employer schemes can give MORE than statutory minimum, never less
Topic 2 of 10
Who is eligible?
Minimum 5 years of continuous service with the same employer. Death or permanent disability waives the 5-year requirement.
Key points
5 years of continuous service — interrupted only by approved leave, maternity, lawful strikes
Death: paid to nominee (or legal heirs) regardless of service length
Permanent disability: paid regardless of service length
Resignation, retirement, retrenchment, termination (except for misconduct): eligible after 5 years
Apprentices are NOT eligible (specifically excluded under Section 2(e))
Watch-out
4 years 7 months = 4 years per the Act (rounding rule applies only to the FINAL year above 6 months). Many employees fall just short — plan job changes around the 5-year mark.
Topic 3 of 10
The formula
For employers covered under the Act: (Last drawn basic + DA) × 15/26 × years of continuous service. For non-covered employers, formula varies.
Key formula
Gratuity = (Last Basic + DA) × 15/26 × Years of service
Key points
15/26 = 15 days' wages out of 26 working days (excluding Sundays)
Last drawn wages — not average, not gross. Just basic + Dearness Allowance
Year rounding: ≥ 6 months in final year rounds UP (5y 7m = 6 yrs); < 6 months rounds DOWN
For non-covered employers: 15/30 (half-month basis), tax-free cap is ₹10 lakh instead of ₹20 lakh
Use BankTalky Gratuity Calculator to compute exact amount
Topic 4 of 10
Tax on gratuity
Tax-free up to ₹20 lakh lifetime cap under Section 10(10) of the Income Tax Act. Excess is taxed as salary income at your marginal slab rate.
Key formula
Exempt = min(actual gratuity, ₹20 lakh, computed gratuity per formula)
Key points
Government / PSU / armed forces: gratuity is FULLY tax-free (no cap)
Private sector: tax-free up to ₹20 lakh LIFETIME cap (across all employers)
Non-Act employers: cap is ₹10 lakh under Section 10(10)(iii)
Death gratuity: fully tax-free to nominee/legal heirs regardless of amount
Excess above cap: taxed in the financial year of receipt at slab rate
Watch-out
If you've already used ₹15L of the ₹20L cap from a previous employer, only ₹5L tax-free remains for future gratuity. Track this across job changes.
Topic 5 of 10
When and how payment happens
Payable within 30 days of becoming due (i.e. cessation of employment). Interest at government-notified rates accrues on delays.
Key points
Employer must determine the amount and notify the employee within 15 days
Pay within 30 days from the date gratuity becomes payable
Delay > 30 days: interest at rate notified by govt (currently ~10% p.a.)
Mode: cash (uncommon), cheque, or bank transfer — your choice as employee
Employer cannot delay citing "no funds" — they must arrange
Topic 6 of 10
Nomination — file early
Every eligible employee must file Form F nomination after 1 year of service. Without a valid nominee, the claim goes through legal heir process — slow and contested.
Key points
File Form F with employer after completing 1 year of service
Update Form F on marriage / divorce / spouse death / child birth
Nominee can be spouse, children (incl. adopted), parents, dependent siblings
If you have family per Act definition, you cannot nominate non-family
Without nomination → goes through succession certificate process (3-12 months delay)
Topic 7 of 10
When gratuity can be forfeited
Section 4(6) of the Act allows partial or full forfeiture in case of specific misconduct — disorderly conduct, riotous behaviour, fraud, or moral turpitude.
Key points
Partial forfeiture: to the extent of damage caused, if employee caused loss to employer (proven via disciplinary action)
Full forfeiture: if termination is for offences involving moral turpitude — but only after due disciplinary process
Mere absconding or breach of contract is NOT grounds — courts have held forfeiture is exceptional
Pending criminal case alone is NOT enough; conviction or proven misconduct is needed
Forfeiture cannot exceed the actual damage caused — overreach is challengeable
Watch-out
Some employers wrongly forfeit gratuity citing "policy violation" — challenge in Controlling Authority (Labour Commissioner) within 90 days. Most such cases are reversed.
Topic 8 of 10
Filing a dispute
If your employer refuses, delays, or shortchanges your gratuity, you can file a complaint with the Controlling Authority designated under the Act.
Key points
Step 1: Form I — written claim to employer (must reply within 15 days)
Step 2: Form N — application to Controlling Authority (Labour Commissioner) if employer refuses
Authority issues notice to employer, hears both sides, passes a binding order
Order is appealable to the Appellate Authority within 60 days
Time limit: file within 90 days of the dispute arising (extendable to 1 year for sufficient cause)
Appeals beyond Appellate Authority go to High Court via writ
Topic 9 of 10
The 2018 amendment — ₹20L cap
The Payment of Gratuity (Amendment) Act, 2018 raised the tax-free cap from ₹10 lakh to ₹20 lakh and authorised the Centre to revise it via notification. The latest cap of ₹20 lakh applies to all post-March 2018 retirements.
Key points
Old cap: ₹10 lakh (since May 2010)
New cap: ₹20 lakh (from 29 March 2018) — applies to retirements on or after this date
Centre can revise the cap via notification without further amendment
Maternity leave for gratuity computation extended from 12 weeks to 26 weeks (aligned with Maternity Benefit Act)
PSU employees: separate notification fixed cap at ₹25 lakh for some segments
Topic 10 of 10
Interaction with other employment laws
Gratuity coexists with EPF, EPS, leave encashment, and notice-period pay. Each is computed separately and paid separately — they don't reduce each other.
Key points
EPF + EPS: separate retirement scheme, paid as per EPFO rules — does NOT affect gratuity
Leave encashment: paid for unused PL/EL at exit — separate from gratuity
Notice-period pay: in lieu of notice — separate again
Provident fund withdrawal: independent of gratuity. You can withdraw PF at 58 and still get gratuity
Code on Social Security 2020 will eventually subsume the Gratuity Act — but it's not fully notified yet (as of May 2026)
Gratuity FAQ
Is gratuity paid by the employer or the government?
Always by your employer. The Payment of Gratuity Act 1972 imposes the legal obligation on employers — there's no government scheme that pays gratuity. Many employers maintain a Gratuity Fund or take an insurance policy (LIC Group Gratuity) to manage the liability, but the obligation to pay you is on the employer.
Can I claim gratuity if I resigned, not retired?
Yes. Section 4(1) lists 5 triggering events: retirement, resignation, superannuation, death, and disablement. All qualify (subject to the 5-year minimum service). Resignation doesn't forfeit gratuity unless you were terminated for cause involving moral turpitude AND due disciplinary process was followed.
What if my employer doesn't pay gratuity?
(1) Send a written claim using Form I, ask for payment within 15 days. (2) If no response or wrong amount, file Form N with the Controlling Authority (Labour Commissioner) within 90 days. (3) The Authority issues notice + hearing + binding order. (4) If still aggrieved, appeal within 60 days to Appellate Authority. Beyond that, writ petition in High Court.
How is gratuity tax computed?
Section 10(10) exempts the LEAST of: (a) actual gratuity received, (b) ₹20 lakh lifetime cap, (c) computed gratuity per the Act formula. Whatever is least is tax-free. Excess is taxed as 'salary income' in the FY of receipt at your marginal slab rate. Government employees have no cap.
Do I get gratuity if I'm terminated?
Yes — unless the termination is for misconduct involving moral turpitude (theft, fraud, violence) AND the employer followed due disciplinary process. Lay-off or retrenchment for business reasons does NOT forfeit gratuity. Probation termination usually before 5 years (so not eligible anyway), but if terminated after 5 years for non-misconduct reasons, gratuity is fully payable.
Can I get gratuity from multiple employers?
Yes, separately from each — each employer's 5-year clock resets. The ₹20L tax-free cap is shared across all employers in your lifetime, but the gratuity AMOUNT from each is fully payable. Example: 6 years at Company A (₹10L gratuity, tax-free) + 8 years at Company B (₹18L gratuity, ₹10L tax-free, ₹8L taxable since cap is exhausted).
Is contractor/agency staff eligible?
Yes if you served continuously with the same employer (principal or contractor) for 5+ years. Whether the principal employer or the contractor is liable depends on contract terms. Courts have ruled that "piercing the corporate veil" applies — if the principal effectively controls the worker, they're liable. Apprentices (formally registered) are excluded by name.