Gratuity in India, 2026 guide for Mumbai employers
Statutory monetary benefit payable to employees with 5+ years of continuous service under the Payment of Gratuity Act 1972. Here is the formula, calculator, eligibility, tax rules and timeline.
Gratuity is a lump-sum statutory payout to an employee on retirement, resignation, death or disability, payable by employers covered under the Payment of Gratuity Act 1972 (10+ employees). Eligibility: 5+ years of continuous service (waived on death/disability). Formula: (Last drawn salary × 15 × years of service) ÷ 26. Maximum payable: ₹20 lakh. Tax exemption: up to ₹20 lakh under Section 10(10) for non-government employees. Payment due within 30 days of becoming payable.
Gratuity calculation under the Act
One formula for employees covered under the Payment of Gratuity Act 1972.
Last drawn salary = Basic + Dearness Allowance · 26 = working days in a month under the Act · 15 = days of wages per completed year of service
Example 1: 10 years service
Example 2: 25 years service (capped)
If an employee completes 240 days of service in the fifth year, that year is generally counted as a full year for gratuity. Madras High Court and Kerala High Court precedents support this interpretation. Check with your legal counsel before applying.
When is gratuity payable
Four trigger events under Section 4(1) of the Payment of Gratuity Act 1972.
1 Superannuation
On reaching the retirement age set by the employer (typically 58 or 60). 5+ years of continuous service required.
2 Retirement or resignation
On voluntary resignation or early retirement, after completing 5+ years of continuous service.
3 Death of employee
Payable to nominee or legal heir regardless of years of service. 5-year minimum is waived.
4 Disability
Payable on disability due to accident or disease. 5-year minimum is waived. Disability must be certified.
Gratuity payable on death of employee
If the employee dies while in service, gratuity is paid to nominee/heir at the rates below (no 5-year minimum applies).
| Service at time of death | Gratuity payable |
|---|---|
| Less than 1 year | 2 × basic + DA |
| 1 to 5 years | 6 × basic + DA |
| 5 to 11 years | 12 × basic + DA |
| 11 to 20 years | 20 × basic + DA |
| More than 20 years | Half month's wage × half of tenure (years) |
Gratuity forms HR needs to know
Statutory forms under the Payment of Gratuity Rules 1972.
Nomination
Employee declares nominees within 30 days of completing 1 year of service.
Application by employee
Filed within 30 days of becoming payable. For retirement/resignation cases.
Application by nominee
On death of employee, nominee submits this to claim the gratuity.
Notice for payment
Employer issues this within 15 days of receiving claim, specifying amount and date of payment.
Income tax on gratuity
Section 10(10) of the Income Tax Act exempts gratuity up to a specified limit.
Government employees
Gratuity received from Central / State / Local Government is fully exempt from income tax, irrespective of amount.
Private sector, covered under Act
Lowest of three is exempt: (a) actual gratuity, (b) ₹20 lakh, (c) (15 × last salary × years) ÷ 26. Balance is taxable as salary income.
Private sector, NOT covered under Act
Lowest of three is exempt: (a) actual gratuity, (b) ₹20 lakh, (c) Half month's salary for each year of service. Half month = basic salary average of last 10 months.
Death case
Gratuity received by the family of a deceased employee is fully exempt from income tax under Section 10(10) regardless of the ₹20 lakh ceiling.
Gratuity FAQs
What is the minimum service for gratuity in India?
An employee must complete 5 years of continuous service to claim gratuity. This rule is waived if the employee dies or becomes disabled while in service, in which case gratuity is payable from day one.
How is the 5-year service calculated?
5 years of continuous service. Periods of authorised leave count. If an employee completes 240 days in the 5th year, that year is generally treated as full per case law. Casual breaks of service may interrupt continuity depending on employer rules.
What is the maximum gratuity payable?
The statutory ceiling under the Payment of Gratuity (Amendment) Act 2018 is ₹20 lakh. Employers can pay above ₹20 lakh as ex-gratia, but the excess is taxable in the employee's hands.
When must the employer pay gratuity?
Within 30 days from the date gratuity becomes payable. If delayed, the employer must pay simple interest on the unpaid amount for the delay period (at the rate notified by the government).
Can gratuity be forfeited?
Yes, under Section 4(6). Gratuity can be fully or partially forfeited if the employee was dismissed for misconduct that caused damage or loss to the employer, or for acts of moral turpitude. Forfeiture must be supported by a domestic inquiry.
Is gratuity taxable for private sector employees?
Up to ₹20 lakh is exempt for non-government employees under Section 10(10). Amounts above ₹20 lakh are taxable as salary income. Gratuity to family of deceased employees is fully exempt.
Does the 26 in the formula refer to working days?
Yes. Section 4(2) treats a month as 26 working days (excluding 4 Sundays). The formula (Salary × 15 × Years) ÷ 26 effectively gives 15 days of wages per completed year of service.
Are contract workers eligible for gratuity?
Yes. The Supreme Court has held that contract workers engaged through contractors but doing work for the principal employer are entitled to gratuity from the principal employer if other eligibility conditions are met.
Related Maharashtra guides
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