Gratuity Eligibility in India: The 5-Year Rule, Exceptions and Tax

The 5-year rule

“Continuous service” means service without a break that the Act treats as interrupting it. The 5 years are counted with the same employer; changing employers restarts the clock unless the law or an agreement provides otherwise, as in some transfers within a group or on a sale of business.

The 5-year condition is about eligibility, not about the amount: once eligible, the formula counts all the service, including the first 5 years. There is no separate deduction for the qualifying period. And remember the rounding edge: 4 years and 7 months counts as 5 years, so eligibility can arrive before five calendar years have passed.

Fixed-term employees: the 2025 change

From 21 November 2025, the Code on Social Security gives fixed-term employees gratuity after one year of service, on a pro rata basis. This is the biggest eligibility change in decades: a fixed-term employee who previously got nothing before five years now qualifies at one year, with the amount proportionate to the service.

Permanent employees are unchanged at five years. If you are on a fixed-term contract, check whether your employer has applied the new rule — it is recent, and payroll practice is still catching up.

Death and disablement: the exceptions

On death or disablement due to accident or disease, gratuity is payable to the employee or their nominee regardless of how short the service was. This is the Act’s most important exception, and it exists because the payment is meant as a family protection as much as a service reward.

Nomination matters here: an employee should have a nominee recorded, because on death the gratuity is paid to the nominee (or, failing one, to the heirs). The formula is unchanged — only the service condition is waived. If a woman dies during maternity leave, the same nominee principle applies to her maternity benefit.

Breaks in service

Not every absence breaks continuity. Leave with wages, leave due to sickness or accident, lay-off, and strikes or lockouts that are not illegal generally do not interrupt continuous service under the Act. Unauthorised absence and some kinds of termination do. Where a break is disputed, the controlling authority decides — a calculator cannot settle it, and this site’s gratuity tool counts continuous calendar service from the joining date entered.

Tax treatment: the lifetime limit

For employees covered by the Payment of Gratuity Act, gratuity up to ₹20 lakh is exempt from income tax. For employees not covered by the Act, the exemption is the least of the actual gratuity, ₹20 lakh, or half a month’s salary per completed year. Government employees’ gratuity is fully exempt.

The point most people miss: the ₹20 lakh exemption is a lifetime limit across every employer. Gratuity exempted earlier reduces what is available later — ₹5 lakh exempted once leaves ₹15 lakh for the future. Any amount above the limit is taxed as salary income at your slab rate. The exemption sits in section 10(10) of the old Income-tax Act and in section 19 of the Income-tax Act, 2025, and applies under both the old and new tax regimes.

When gratuity can be forfeited

Gratuity can be wholly or partly forfeited where an employee’s services are terminated for wilful omission or negligence causing loss or damage to the employer’s property, or for riotous or disorderly conduct or any act of violence, or for an offence involving moral turpitude committed in the course of employment. Forfeiture is not automatic on any dismissal — it requires the specific grounds and, in practice, an order. If forfeiture is threatened, the grounds and the procedure are worth challenging.

Claiming gratuity: the process

Apply in writing to the employer when gratuity becomes due — on retirement, resignation, death or disablement. The employer must pay within 30 days; delay attracts interest. If the employer does not pay, or pays less than the statutory figure, the dispute goes to the controlling authority, which can order payment. Keep the appointment letter, salary slips showing basic plus DA, and the service record: those three documents decide almost every gratuity dispute.

Common mistakes to avoid

Assuming any resignation before 5 years earns a proportionate gratuity (it generally does not, except fixed-term employees from 2025 and death/disablement); assuming a transfer preserves service automatically (it depends on the terms); forgetting nomination; confusing the ₹20 lakh tax exemption with a per-employer cap; and accepting a forfeiture or a 15/30 calculation without checking coverage and grounds.