Gratuity Before 5 Years of Service - Eligibility, Exceptions, and Calculation (2025)

Gratuity is a statutory benefit that applies to all employees who have rendered their services to an organisation for a specific period. The gratuity amount is usually paid to the employee in a lump sum based on the number of years of service they render. The gratuity benefit is payable to the employee upon resignation, death, retirement, or termination of employment. Employers consider the employee's last drawn salary as the basis for calculating gratuity. It is an integral part of employees' salary structure and is regulated under Section 4(1) of the Payment of Gratuity Act, 1972. Although the act states that the gratuity benefit is payable after five years of service with the same organisation, there is ongoing debate about eligibility. If you are wondering whether you are eligible for gratuity after completing more than four years of service but not five years, the answer is in Section 4(2) of the Payment of the Gratuity Act. It spells out the condition for employee gratuity if he/she has not completed five years of service. The section says that for every year of completed service (more than six months), the employee can receive gratuity. As an employee, if you work in an organisation for more than six months, you are entitled to get the gratuity.

Section 4 of the Payment of Gratuity Act, 1972 sets five years of continuous service as the standard qualifying condition. But this isn't absolute - the law itself carves out situations where gratuity becomes payable well before an employee completes five years:

• Death of the employee: the gratuity amount goes to the nominee or legal heir irrespective of how long the person had worked - even a single day of service is enough to trigger this entitlement.
• Permanent disablement: if an accident or illness leaves an employee unable to continue working, the five-year condition is waived entirely.
• Completion of a fixed-term contract: where the contract itself runs for less than five years, gratuity becomes due once that contract period ends.
• Closure or layoff by the employer: where a business shuts down, courts have in several cases held that employees with under five years of service may still be entitled to gratuity.

Also Read: What is Gratuity?

A recurring question in gratuity disputes is what actually counts as completing the fifth year. Judicial interpretation - most notably reaffirmed by the Supreme Court in a 2023 ruling - has treated the phrase "continuous service" more liberally than a literal five-calendar-year reading.

• For employees on a six-day working week, putting in 240 working days during the fifth year is treated as having completed that year of service.
• For those on a five-day working week, the equivalent threshold works out to 190 working days.
• Periods of authorised leave, maternity leave, or lockouts/layoffs are usually excluded when counting these working days, but importantly, they don't break the continuity of service either.

In practical terms, this means someone who resigns after four years and eight months, having already clocked 240-plus working days in that fifth year, may well have a legitimate claim to gratuity - a point that comes up frequently in labour disputes and court judgments.

For organisations with 10 or more employees, which fall under the Payment of Gratuity Act, the payout is calculated as:

(Last drawn basic pay + Dearness Allowance) × 15 × number of completed years of service ÷ 26

A service period under six months is dropped entirely from the calculation, while anything beyond six months gets rounded up to the next full year.

For instance, someone who has worked 4 years and 8 months - and qualifies through the 240-day rule described above - with a last-drawn basic-plus-DA of ₹40,000, would see this rounded up to 5 years for calculation purposes: (40,000 × 15 × 5) ÷ 26, which works out to roughly ₹1,15,384.

Where an organisation isn't covered under the Act, gratuity is often still paid voluntarily, but usually on a different and somewhat less generous formula: (Last drawn salary × 15 × years of service) ÷ 30. The exact terms here depend entirely on the employer's own policy.

As things stand today, before the Labour Codes are fully rolled out, fixed-term employees are held to the same five-year requirement as permanent staff. A contract running shorter than five years won't attract gratuity unless one of the exceptions - death or disablement - applies.

This is set to change under the Labour Code of 2020: once fully in force, fixed-term employees will become eligible for gratuity on a pro-rata basis right from their first year, effectively doing away with the five-year condition for this category of workers. A handful of states have already begun implementing this through their versions of the Industrial Relations Code, so it's worth checking the specific status in your state.

Gig workers, platform-based workers, and those employed on a daily-wage basis currently fall outside the scope of the Payment of Gratuity Act altogether.

You can calculate your gratuity amount using the following formula:

Gratuity = N x B x 15/26

In the above formula, N is the number of years of service rendered, and B is the last drawn salary (Basic salary + Dearness Allowance).

Let us understand the gratuity calculation with an example. Let us assume that you were employed with a company named ABC for five years. Your last drawn salary (basic + DA) at the time of leaving the company was Rs. 50,000. As per the above formula, your gratuity will be calculated as:

Gratuity = 5 x 50,000 x 15/26 = Rs. 1,44,230

Note: Although there are 30/31 days in most months of the years, under the Payment of Gratuity Act, 1972, the number of working days in a month is 26.

Section 4(6) of the Act does allow an employer to forfeit gratuity, but only on specific grounds: wilful negligence or omission that causes loss or damage to the employer's property, conduct involving moral turpitude, riotous or violent behaviour, or termination on account of proven misconduct.

Even then, the forfeiture can be full or only partial, depending on the actual loss caused - and the employer carries the burden of proving the ground cited; gratuity cannot simply be withheld at will.

It's worth noting that this forfeiture provision has nothing to do with an employee who resigns before becoming eligible - in that case, there's simply no entitlement to begin with (unless one of the exceptions applies), rather than an entitlement being taken away.

There's a defined legal process to follow if an employer doesn't pay up:

• Submit a written claim using Form I to your employer within 30 days of becoming eligible.
• The employer is required to make payment within 30 days of receiving this claim - delayed payments attract simple interest at a rate notified by the government.
• If the employer still refuses, you can approach the Controlling Authority - typically the Labour Commissioner of your district - under Section 7(4) of the Act.
• The Controlling Authority will then summon the employer and pass a formal award on the matter.
• Should the employer continue to default even after the award, the Controlling Authority can issue a recovery certificate to the Collector, allowing the amount to be recovered as though it were arrears of land revenue.

Wilful non-payment also carries criminal consequences - imprisonment of up to two years, a fine, or both. One important thing to keep in mind is the limitation period: a complaint generally needs to be filed within 60 days of gratuity becoming due, though this can be extended up to a year where there's valid reason for the delay.

Also Read: Taxation of Gratuity - Everything you Need To Know

The employer must pay the gratuity amount within 30 days from when it becomes payable to the beneficiary. However, if the employer fails to pay the amount within the specified period, as a beneficiary, you are entitled to receive a simple interest on the amount. You must take note that the gratuity amount is payable only in cash unless you, nominee or the legal heir make a specific request for the amount to be paid in DD (Demand Draft) or Cheque.

If you don't get the gratuity payment within 30 days from the date it becomes payable, you can write a complaint to the Controlling Authority. Non-payment of gratuity is a punishable offence, and the employer shall be charged with imprisonment for a term not less than three months and/or with a fine not less than Rs. 10,000 and not more than Rs. 20,000.

The employer can forfeit the gratuity payment to the employee under specific conditions, where the employee's service is terminated due to any of the following reasons: violent behaviour with other employees within the organisation premises, any disorderly misconduct, or involvement in any illegal activities or committing an offence involving moral turpitude. The employer has the right to forfeit the gratuity partially to the extent of damage or loss caused or forfeit the full amount.

If you have completed one year of service in an organisation, you must make a nomination for the gratuity payment in the event of your untimely demise. You can appoint more than one person as a nominee by filling Form F. Ensure that you fill the nominee details correctly so that it is easily verifiable at the time of gratuity payment. You can choose to change the nominee details or the person by giving written notice to the employer and filling Form H. If you fail to nominate a beneficiary, the gratuity amount will be paid to the legal heir.

As per the Gratuity Act, the maximum gratuity amount payable to the employees is limited to Rs. 20 lakhs over the entire working life. Hence, even in case of multiple gratuity payments, the total amount shall not exceed Rs. 20 lakhs.

• Government employees: the entire gratuity amount is exempt from income tax, with no upper limit.
• Private-sector employees covered under the Payment of Gratuity Act: exemption is capped at whichever is lowest among the actual gratuity received, ₹20 lakh, or 15 days' salary for every year of service.
• Private-sector employees not covered under the Act: exemption is capped at whichever is lowest among the actual gratuity received, ₹10 lakh, or half a month's average salary for every year of service.
• Gratuity paid on account of an employee's death is fully tax-exempt, with no monetary ceiling.
• Where gratuity is received across multiple employers or in instalments over a career, the ₹20 lakh exemption applies as a lifetime aggregate limit, not per payout.

Under the Income Tax Act, the gratuity received up to a limit of Rs. 20 lakhs is exempted from tax.

Gratuity is an essential aspect of your employment benefits. Ensure you know your gratuity rights. If you have worked for the same organisation for four years and 240 days, you are entitled to it.

Also Read: What is The Gratuity Eligibility Criteria?