Gratuity Act 1972: Eligibility, Calculation & Payment Rules

Under the Payment of Gratuity Act, 1972, an employee became eligible for gratuity after five years of continuous service, on retirement, resignation, death or disablement. The formula is last drawn salary (basic plus dearness allowance) × 15 ÷ 26 × completed years of service, capped at ₹20 lakh under the Act. Payment is due within 30 days. Important update: the Act was repealed on 21 November 2025 and replaced by the Code on Social Security, 2020, which also gives fixed-term employees pro-rata gratuity after one year. Employers should check current notified limits. Notified limits can change, so verify them first.

Payment of Gratuity Act, 1972: Where It Stands Now

Gratuity is a lump sum an employer pays as thanks for long service. For fifty years the Payment of Gratuity Act, 1972 governed it. In November 2025 the Act was repealed and its rules moved into the Code on Social Security, 2020, alongside provident fund, ESI and maternity benefit.

In practice, the principles you know still apply: a five-year qualifying period for most employees, a standard formula and a statutory ceiling. The headline change is for fixed-term employees, who now receive pro-rata gratuity after one year of service rather than waiting five. Exact ceilings and procedures can be updated by notification, so confirm the current figures before you pay.

Who Is Eligible

Gratuity applies when an employee has completed five years of continuous service and leaves because of:

• Retirement or superannuation
• Resignation
• Death or disablement, in which case the five-year condition does not apply

Continuous service generally allows for ordinary breaks such as authorised leave, so a few absence days do not reset the clock. Fixed-term employees follow the shorter one-year rule under the new code.

How to Calculate Gratuity

The formula

Gratuity = last drawn salary × 15 ÷ 26 × years of service

Last drawn salary means basic pay plus dearness allowance. The figure 15 stands for fifteen days' wages, and 26 represents the working days in a month.

Rounding the years

A part year of more than six months is usually rounded up. So seven years and seven months counts as eight years, while seven years and five months stays at seven.

Worked example

Take an employee with basic plus DA of ₹40,000 and eight years of service.

₹40,000 × 15 ÷ 26 × 8 = ₹1,84,615 (rounded)

If the same person had stayed 10 years, the figure would be ₹2,30,769.

The ceiling

The 1972 Act capped gratuity at ₹20 lakh. Employers should check the figure currently notified under the Code, as ceilings can be revised.

Payment Rules

Gratuity should be paid within 30 days of becoming due. Delay can attract simple interest, and employers usually need to pay without waiting for the employee to chase. Nominations matter too. If an employee dies, gratuity goes to the nominee, so keep nomination forms current and filed. Disputes are generally routed to the controlling authority named in the rules.

Whether gratuity is taxable depends on the current income tax provisions and the employee's category, so employees should check the latest exemption limits before planning around the payout.

Why Fixed-Term Gratuity Changes Payroll Planning

Fixed-term hiring is common in project work, seasonal operations and short assignments. Under the new code, even a person who leaves after thirteen months may be entitled to a pro-rata amount. That means HR teams should record start dates, contract end dates and gratuity liability from the very beginning, rather than treating gratuity as a retirement problem.

Managing Gratuity With OfficePortal

Gratuity errors usually come from missing tenure records or the wrong salary base. With OfficePortal, joining dates, designation history and compensation sit in HR management software, so service length is always one click away. Cloud-based payroll software automates salary processing and statutory deductions, which keeps the basic and allowance split consistent.

Nomination forms, contracts and experience letters can be kept in HR document management software with encrypted storage, and unpaid leave that may affect continuous service can be reviewed in the leave management system. Hospitals, for instance, with long-serving clinical and support staff, can see how it applies on our healthcare HR software page.

For background on how gratuity fits among other obligations, read our guide to statutory compliance meaning and HR checklist, and our note on long-term employment, its benefits and types.

Employer Checklist

1. Record the date of joining accurately for everyone.
2. Define your gratuity salary base clearly: basic plus DA.
3. Estimate and provision for liability every year.
4. Keep nomination forms updated.
5. Pay within 30 days and keep proof.

Conclusion

Gratuity looks simple on paper, but accurate tenure and salary records decide whether a payout is right. The Payment of Gratuity Act, 1972 gave the formula, and the Code on Social Security now carries it forward with a shorter rule for fixed-term staff. OfficePortal keeps the data behind that calculation consistent. See OfficePortal payroll in action with a free account for up to five users.