An employee walks into your cabin, hands in their resignation, and says, “Sir, I’ve done 4 years and 9 months, I’ll get gratuity, right?” You know the answer is no — but explaining why, without sounding like you’re dodging a payout, is where most HR managers fumble. And then there’s the other side: an employee who died in service after 3 years, and someone on the floor insists “gratuity nahi milega, 5 saal nahi hue.” That one’s wrong too.

Gratuity eligibility in India looks simple on paper — complete 5 years, get gratuity. In practice, it’s full of exceptions that trip up even experienced payroll teams. This guide walks through exactly how the 5-year rule works, when it doesn’t apply, what changed under the new labour codes, and how to use EZHRM’s gratuity calculator to get the number right the first time.

TL;DR

Gratuity normally needs 5 years of continuous service — but “5 years” legally means 4 years and 240 days (or 190 days for a 5-day-week establishment), not a full calendar 5 years.

Death or permanent disablement waives the 5-year rule entirely — gratuity is payable even after 6 months of service.

Under the Code on Social Security, 2020 (effective November 2025), fixed-term employees qualify for pro-rata gratuity after just 1 year.

Gratuity is tax-free up to ₹20 lakh under Section 10(10) of the Income Tax Act — use the gratuity calculator to check your exact payable and taxable amount.

What gratuity actually is, and why HR gets the eligibility wrong

Gratuity is a lump-sum, statutory retirement benefit an employer pays to an employee for continuous service, governed by the Payment of Gratuity Act, 1972 and now folded into the Code on Social Security, 2020. It’s not a bonus, it’s not discretionary, and once an employee crosses the eligibility threshold, it’s a legal entitlement — not something you can withhold because the exit was messy (forfeiture has its own separate, narrow rules around misconduct, which we’ll get to).

The confusion almost always comes from one place: HR managers treat “5 years” as a literal five calendar years counted day-for-day. It isn’t. And that single misunderstanding is why so many rejected gratuity claims end up as labour court disputes.

The 5-year rule: what “continuous service” legally means

Under Section 2A of the Payment of Gratuity Act, a “year of continuous service” doesn’t require 365 days of actual attendance. An employee is deemed to have completed a year if they’ve worked at least:

240 days in a 12-month period, for establishments working a 6-day week
190 days in a 12-month period, for establishments working a 5-day week (and for mines)

This means an employee who joined on, say, 10 January 2022 and resigns on 5 October 2026 has technically completed “5 years” for gratuity purposes even though the calendar gap is 4 years and roughly 9 months — because courts have consistently held that once an employee crosses 240 days in the fifth year, that year counts in full. This is the single most litigated point in gratuity disputes, and it’s worth building into your HRMS exit-checklist logic rather than eyeballing it from the joining date.

Days that count toward the 240/190-day threshold

Days of actual work performed
Leave with wages (earned leave, sick leave as per policy)
Maternity leave (up to the period specified under law)
Days laid off under an agreement or standing orders
Absence due to a temporary disablement caused by an employment accident

When the 5-year rule doesn’t apply at all

This is the part that trips up HR teams most often, because it’s an exception to the exception. The 5-year requirement is waived completely in two situations:

Death of the employee — gratuity is paid to the nominee or legal heir regardless of how long the employee had worked, even if it was just a few months.
Permanent total disablement due to accident or disease — the employee (or their representative) is entitled to gratuity irrespective of completed years of service.

In both cases, the amount is calculated as if the employee had actually put in the years up to the date they would have superannuated, in some interpretations — but the safest and most defensible approach is to calculate it on actual service rendered using the standard formula, and let your legal/compliance advisor confirm treatment for death cases involving young employees. Run both scenarios through the gratuity calculator before you finalize a settlement letter.

Fixed-term employees: the rule most HR teams haven’t updated yet

Here’s a genuinely new development that a lot of SME HR teams have missed. Under the Code on Social Security, 2020, which came into effect from 21 November 2025, fixed-term employees are now eligible for pro-rata gratuity after completing just 1 year of service — not 5. This is a major shift for industries that rely heavily on fixed-term contracts: manufacturing, retail, IT staffing, and BPOs.

If your organisation hires on fixed-term contracts and your payroll or HRMS is still applying the old 5-year rule uniformly, you are under-provisioning gratuity liability and risking non-compliance the moment an audit or an employee grievance surfaces. This is exactly the kind of policy change that needs to be reflected in your statutory compliance setup, not just noted in an HR policy PDF nobody re-reads.

Gratuity eligibility at a glance

Exit scenario	Minimum service required	Gratuity payable?
Resignation	5 years (4 yrs 240/190 days)	Yes, if threshold met
Retirement / Superannuation	5 years	Yes
Termination (not for misconduct)	5 years	Yes
Death in service	None — waived	Yes, always
Permanent disablement	None — waived	Yes, always
Fixed-term contract employee	1 year (pro-rata)	Yes, under Code on Social Security, 2020
Termination for proven misconduct causing loss	N/A	Can be wholly/partly forfeited per Section 4(6)

How much gratuity is actually payable

The calculation formula hasn’t changed under the new labour code: gratuity is calculated as (Last drawn wages × 15 × number of years of service) ÷ 26, where wages means basic salary plus dearness allowance, and 26 represents the working days in a month. Two things HR teams get wrong here:

Using gross salary instead of basic + DA — this inflates or understates the number depending on your CTC structure. If your basic is unusually low relative to CTC, double-check it against the 50%-of-CTC wage definition under the new codes, which affects several exit calculations, not just gratuity — see our CTC structuring guide for how this plays out.
Rounding years of service incorrectly — a period of 6 months or more in the last year is rounded up to a full year; anything less is ignored.

Rather than running this by hand every time someone exits, plug the last drawn basic+DA and tenure into the EZHRM gratuity calculator — it applies the 15/26 formula and rounding rules automatically and gives you a number you can defend in an exit conversation.

Tax on gratuity: the ₹20 lakh number everyone quotes but few explain

Under Section 10(10) of the Income Tax Act, gratuity received by an employee covered under the Payment of Gratuity Act is tax-exempt up to ₹20 lakh — this limit has been in place since a 2018 CBDT notification and continues to apply for FY 2026-27. A few nuances HR should flag to exiting employees:

Government employees get full exemption with no cap.
The ₹20 lakh limit is a lifetime cumulative ceiling across all employers an individual works for, not a per-employer limit.
Any amount paid above ₹20 lakh is taxable as salary income in the employee’s hands, at their applicable slab rate.
For employees not covered under the Act (rare, but possible for very small establishments), the exempt amount is the lowest of: ₹20 lakh, half a month’s salary per year of completed service, or the actual gratuity received.

This is worth flagging clearly in the settlement letter, especially for senior employees with long tenures where the payout could genuinely exceed ₹20 lakh — a mistake here shows up as an employee grievance months later when they file their ITR.

What HR managers get wrong on gratuity eligibility

Counting from the joining date to the last working day literally, instead of applying the 240/190-day rule for the final partial year.
Assuming death and disablement need any minimum tenure — they don’t, and rejecting or delaying such claims can invite penal interest under the Act.
Not updating fixed-term contract templates and payroll logic for the 1-year pro-rata rule under the new labour code.
Forfeiting gratuity without following due process — forfeiture for misconduct requires the misconduct to have caused financial loss or to involve moral turpitude proven through a disciplinary inquiry, not a manager’s say-so.
Ignoring the interplay with full and final settlement — gratuity should be computed and disclosed alongside leave encashment and other dues; run both through the F&F settlement calculator and the leave encashment calculator so the exit letter has one consistent set of numbers.

FAQs on gratuity eligibility in India

Is an employee eligible for gratuity after exactly 4 years and 8 months?

Generally no — they need to cross 240 days (or 190 for a 5-day week) into the 5th year of service. 4 years 8 months typically falls short unless the establishment counts differently based on specific attendance records. Always verify with actual attendance data, not just tenure dates.

Does an employee get gratuity if they resign before 5 years?

Not usually, unless the exit is due to death or permanent disablement, in which case the 5-year rule doesn’t apply at all. For a standard resignation short of the threshold, no statutory gratuity is payable.

Can an employer deny gratuity for poor performance?

No. Gratuity can only be forfeited, wholly or partly, for proven misconduct involving moral turpitude or acts causing financial loss to the employer, established through a proper disciplinary process — not for performance issues.

Are fixed-term/contract employees eligible for gratuity now?

Yes. Under the Code on Social Security, 2020, effective from November 2025, fixed-term employees are eligible for pro-rata gratuity after completing just 1 year of continuous service, unlike the 5-year rule for regular employees.

Is gratuity fully tax-free?

It’s exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act for private-sector employees covered by the Act, and this is a lifetime cumulative limit. Government employees get full exemption. Amounts above ₹20 lakh are taxed at slab rates.

How is gratuity calculated for someone who worked 7 years 4 months?

Only the completed years count unless the extra period crosses 6 months, in which case it’s rounded up. 7 years 4 months would be treated as 7 years for the formula: (Last drawn Basic+DA × 15 × 7) ÷ 26.

Getting this right, every time

Gratuity eligibility isn’t hard once you know where the exceptions live — but it’s exactly the kind of calculation that shouldn’t depend on someone in HR remembering the 240-day rule correctly under deadline pressure. If you’re settling exits manually or double-checking numbers in Excel, run them through EZHRM’s free gratuity calculator instead — it applies the eligibility exceptions, the 15/26 formula, and the ₹20 lakh tax treatment automatically, so your F&F letters are accurate the first time.

You’ll find this alongside our other free HR calculators for CTC, bonus, overtime, and leave encashment — and more practical guides like this one on our HR blog.

Sources: Ministry of Labour & Employment, Government of India; Income Tax Department, Government of India.