Gratuity Eligibility, Payout, and Formula: Leaving Job Before 5 Years? Here’s How You Can Still Get Gratuity

Gratuity Eligibility and Continuous Service

Gratuity is often part of a salaried employee’s CTC (cost to company). According to the Payment of Gratuity Rules, 1972, employees become eligible for gratuity after completing five years of continuous service with an organization.

However, did you know that you can qualify for gratuity payout before completing five years, provided you serve beyond a particular duration? According to an ET report, experts say that employees qualify for gratuity upon completing 4 years and 240 days with an organization.

For example, if someone began working at an organization on January 1, 2021, they would be eligible for gratuity upon leaving after August 29, 2025. This eligibility occurs because they would have served 4 years and 240 days by then, although their five-year milestone would only be completed by January 1, 2026.

This provision exists because of how continuous service is defined in the Payment of Gratuity Act.

Puneet Gupta, Tax Partner, EY India, told ET, “Section 4(1) of the Payment of Gratuity Act says that gratuity will be payable if an employee has rendered a minimum continuous service of five years. Section 2A of the Payment of Gratuity Act defines continuous service. Section 2A(2) of the Gratuity Act defines the deemed-to-be in continuous service. An employee is deemed to be in continuous service for one year if an employee during the 12 preceding calendar months has worked under the employer for not less than 190 days or 240 days, as the case may be.”

Gratuity Eligibility for Different Types of Employees

• Employees working in underground mines or establishments operating fewer than six days weekly must complete 190 days.
• Other employees need to complete 240 days.

When an employee completes more than 240 days in the fifth year, they are considered to have completed an additional year of service, totaling five years, thus becoming eligible for gratuity.

How is Gratuity Payment Calculated? Formula Explained

Gratuity payment calculations are governed by specific guidelines outlined in the Payment of Gratuity Act. The calculation method varies depending on whether employees fall under the Act’s purview or not.

For Employees Covered by the Payment of Gratuity Act

The Act’s applicability is determined by the organization’s workforce size. If an organization has employed 10 or more people on any single day within the previous 12 calendar months, it comes under the Act’s jurisdiction. Once covered, the organization remains subject to the Act even if staff numbers subsequently decrease below 10.

For staff members covered by the Payment of Gratuity Act, the payment is calculated using 15 days of their final drawn salary for each full year of service, including any period exceeding six months.

The calculation method is: (15X Final drawn salary X Service duration)/26

The final drawn salary encompasses basic pay, dearness allowance, and sales commission, as stipulated in the Act.

For Employees Not Covered by the Payment of Gratuity Act

Gratuity remains payable even when organizations aren’t covered by the Payment of Gratuity Act. In such instances, the gratuity is calculated as half a month’s salary per completed service year, disregarding any incomplete year (months less than a year) in the calculation.

The gratuity calculation follows this equation: (15 X Last drawn salary X Number of years of completed service)/30.