Gratuity Rules: Eligibility, ₹20 Lakh Limit & Tax Explained

Knowing the gratuity formula is only half the story. Whether you actually receive gratuity — and how much of it you keep after tax — depends on a set of rules around eligibility, the statutory limit, taxation, and forfeiture. This guide brings those rules together in plain language so you know exactly where you stand.

To see how the rules apply to your own service and salary, use the Gratuity Calculator, which flags eligibility, applies the ₹20 lakh cap, and shows your tax-exempt amount.

Who is eligible: the 5-year rule

The core eligibility condition under the Payment of Gratuity Act, 1972 is 5 years of continuous service with the same employer. Continuous service means uninterrupted employment, including periods of authorised leave, sickness, accident, or lay-off.

Key points:

• Gratuity becomes payable on resignation, retirement, superannuation, death, or disablement.
• The 5-year condition is waived for death or disablement — gratuity is paid regardless of tenure, to the employee (disablement) or the nominee/legal heir (death).
• Below 5 years (in normal exits), no gratuity is payable.

The 4-years-240-days question

A frequent source of confusion is whether 4 years and 240 days counts as five years. Some High Court rulings have held that completing 240 days in the fifth year satisfies the "continuous service" test. This interpretation is not universally applied, so treat it as a grey area. The Gratuity Calculator uses the conservative whole-year rule and clearly marks whether you are eligible, so you can raise borderline cases with HR or a professional.

Which employers are covered?

The Act applies to establishments with 10 or more employees — factories, mines, plantations, ports, railways, shops, and other notified establishments. Once covered, an establishment stays covered even if its headcount later drops below ten.

Coverage matters because it changes the formula divisor (26 for covered, 30 for not covered) and the rounding of part-years. Employees of non-covered establishments may still receive gratuity if the employer chooses to pay it, using the ÷30 basis. You can compare both scenarios instantly with the coverage toggle in the Gratuity Calculator.

The ₹20 lakh limit

Following the 2018 amendment, the maximum gratuity under the Act is ₹20,00,000 (₹20 lakh). This cap applies no matter how long you have worked or how high your salary is — the formula amount is simply limited to ₹20 lakh.

Importantly, ₹20 lakh is also the lifetime tax-exemption ceiling (see below). If you receive gratuity from more than one employer over your career, the exemptions are aggregated against this single ₹20 lakh lifetime limit.

Gratuity taxation under Section 10(10)

How gratuity is taxed depends on your employer category.

Government employees

Gratuity received by Central/State Government and local authority employees is fully exempt from income tax. There is no upper limit for them.

Non-government employees covered by the Act

The exemption is the least of these three:

1. ₹20,00,000 (the lifetime limit),
2. The actual gratuity received, and
3. (15 ÷ 26) × last drawn salary × years of service (the formula amount).

Any amount above the exemption is taxable as "income from salary".

Non-government employees not covered by the Act

The exemption is the least of:

1. ₹20,00,000,
2. The actual gratuity received, and
3. Half a month's average salary (last 10 months) × years of completed service.

In most cases where the employer pays exactly the formula amount, the entire gratuity (up to ₹20 lakh) is exempt and nothing is taxable. A taxable portion typically arises only when the employer pays ex gratia above the statutory formula. The Gratuity Calculator shows your tax-exempt and taxable split, and you can see the effect on your overall tax with the Income Tax Calculator.

When gratuity can be forfeited

Gratuity is a right, but it can be forfeited in specific situations:

• Partial or full forfeiture if your services are terminated for wilful damage or loss to the employer's property (to the extent of the damage).
• Full forfeiture if termination is for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment.

Forfeiture requires due process; it is not automatic. Ordinary resignation or retirement does not trigger it.

How to claim your gratuity

1. Apply using Form I to your employer once gratuity becomes due.
2. The employer must pay within 30 days; delays attract simple interest.
3. Keep your nominee updated via Form F so the benefit reaches the right person on death.
4. If payment is refused or delayed, escalate to the Controlling Authority (Labour Commissioner) under the Act.

Gratuity in your overall retirement plan

Gratuity is a valuable one-time payout, but it works best as part of a broader plan:

• EPF — your monthly-built retirement corpus; project it with the EPF Calculator.
• PPF and mutual funds — voluntary long-term savings via the PPF Calculator and SIP Calculator.
• Tax planning — the Income Tax Calculator and HRA Calculator help you optimise the salaried side.

Frequently asked questions

How many years for gratuity eligibility? Generally 5 years of continuous service. The condition is waived on death or disablement.

Does 4 years and 240 days count as 5 years? Some court rulings accept it, but it is not universally applied. Treat it as a grey area and confirm with your employer or a professional.

What is the maximum tax-free gratuity? Government employees: fully exempt. Others: exempt up to ₹20 lakh (the least of ₹20 lakh, actual gratuity, and the formula amount).

Can gratuity be denied? Yes, it can be forfeited for wilful damage, or for termination due to violence or an offence involving moral turpitude, subject to due process.

Is gratuity paid on resignation? Yes, provided you have completed 5 years of continuous service.

How much of my gratuity is taxable? Usually none, if the employer pays the statutory formula amount within ₹20 lakh. A taxable portion arises mainly on ex-gratia amounts above the exemption. Check with the Gratuity Calculator.

Check your eligibility and tax-free amount with the Gratuity Calculator, then complete your retirement picture with the EPF, PPF, and Income Tax calculators.

Disclaimer: This article is for general information only and is not legal or tax advice. Verify against official sources or consult a qualified professional.