What is the 5-year rule for gratuity in India?

Under the Payment of Gratuity Act, 1972, an employee is eligible for gratuity only if they have completed 5 years of continuous service with the same employer.

Is gratuity taxable in India?

Gratuity received is tax-exempt up to ₹20 Lakhs for private-sector employees. Any amount exceeding this limit is taxable as 'Income from Salary'.

Can an employer withhold my gratuity?

Only in cases of termination for 'gross misconduct' involving violence or moral turpitude. Employers cannot withhold it for minor performance issues or simple resignation.

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Gratuity Rules & Calculation in India: Are You Eligible? (2026 Guide)

By Contract Shield Legal Team • 8 min read • Updated Feb 14, 2026

Worked for 5 years at the same company? Congratulations, you have unlocked a significant bonus called Gratuity.

Under the Payment of Gratuity Act, 1972, employers are mandated to pay a lump sum amount to employees who have rendered continuous service for at least 5 years. It's a token of appreciation for long service.

                    Exception to 5 Years: If an employee dies or becomes disabled due to an accident or disease, the 5-year rule is waived. Their nominee/heir gets the gratuity amount based on the tenure served.
                

1. Eligibility Criteria

Who is covered? Any factory, mine, oilfield, plantation, port, railway company, shop, or establishment with 10 or more employees.
Continuous Service: Must complete 5 continuous years. Interruptions due to sickness, accident, leave, layoff, strike or lockout are ignored, provided it wasn't the employee's fault (e.g., illegal strike).

2. Gratuity Calculation Formula

The standard formula for calculating gratuity is:

                    Gratuity = (15 × Last Drawn Salary × Tenure) / 26
                

Last Drawn Salary: Basic Salary + Dearness Allowance (DA). Excludes HRA, bonus, etc.
15: Wages for 15 days per year of service.
26: Number of working days in a month.
Tenure: Number of completed years of service. Guidelines say >6 months is rounded up to 1 year.

3. Tax Exemption Amount

As per current Income Tax rules (2026), gratuity received is tax-exempt up to ₹20 Lakhs for private employees covered under the Act. For government employees, the entire amount is tax-free.

4. FAQs on Gratuity

I resigned after 4 years and 8 months. Will I get gratuity?

Unfortunately, no. The Madras High Court and others have ruled strictly on the 5-year completion. Some employers may pay ex-gratia, but it's not statutory.

Is gratuity applicable to contract employees?

Yes, if they are considered employees on the rolls of the company. However, consultants/freelancers raising invoices are not eligible.

Can an employer forfeit gratuity?

Yes, but only if the employee was terminated for: 1. Willful omission or negligence causing damage/loss to property. 2. Riotous or disorderly conduct or violence. 3. Moral turpitude committed in the course of employment.

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