When the gratuity chapter applies
Reviewed 16 October 2026. Gratuity is governed by Chapter V of the Code on Social Security, 2020. Its First Schedule covers specified establishments at any size and shops or establishments that meet the statutory employee threshold. Confirm the establishment's category, headcount and coverage history before deciding whether the chapter applies.
Service conditions
For most employees, gratuity becomes payable on termination after five years of continuous service, including retirement or resignation. The five-year condition does not apply in cases of death or disablement. A fixed-term employee who completes one year under the fixed-term contract may qualify under the Code; check the contract and current rules.
Calculation
For a monthly-rated employee, the general statutory formula is 15 days' wages for each completed year of service, or part of a year exceeding six months. The familiar estimate is last-drawn monthly wages × 15 ÷ 26 × qualifying service years. Use the Code's definition of wages, including the applicable components and add-back rule; do not assume that basic pay plus dearness allowance is always the complete wage base.
Service length, wage history, the employee category and any notified ceiling affect the result. The Code also has different treatment for certain cases, including seasonal and piece-rated employees. Our Gratuity Calculator is an estimate for a standard monthly-rated case; verify the rule and inputs before settling a claim.
Payment, interest and nomination
Once gratuity becomes payable, the employer must determine the amount and arrange payment within 30 days. The Code provides for simple interest on delayed payment at the rate notified by the Central Government, subject to the statutory exception for delay caused by the employee where the competent authority has given written permission. The interest rate is not automatically the EPF interest rate.
Employees who complete one year of service must make a nomination in the form and manner prescribed by the appropriate government. Use the current rules and portal instructions instead of relying on legacy Form F or a generic filing deadline.
Tax treatment
Income-tax exemption is a separate question from gratuity eligibility and calculation. The applicable limit and treatment depend on the tax law, tax year, employee category and facts. Check the current Income Tax Department guidance; do not use an old ₹20 lakh statement without confirming that it applies to the relevant payment and tax year.
Official references
Read the Code on Social Security, 2020 and the Ministry's 2026 Labour Codes FAQs. GHR Consultancy supports Kerala employers with payroll and final-settlement reviews; contact us.