Gratuity and Provident Fund are separate employment benefits. Gratuity is an employer-funded lumpsum linked mainly to your wages and length of service with that employer. The Employees Provident Fund (EPF) is a contributory account that generally receives monthly employee and employer contributions and can continue across eligible jobs through your Universal Account Number.
In practical terms, EPF builds month-by-month, while gratuity usually becomes payable when employment ends after the applicable service condition is met. Most eligible employees should account for both benefits in retirement planning rather than choose between them.
What is the difference between gratuity and Provident Fund?
The main difference is how the benefit is funded and earned. Gratuity is a statutory employer liability calculated mainly from eligible wages and completed service. EPF is a defined contribution benefit. Contributions are credited periodically to an individual account, subject to the Employees Provident Funds Scheme and related rules.
|
Point
|
Gratuity
|
Employees Provident Fund
|
|
Funding
|
Funded by the employer. No separate statutory employee contribution is deducted as gratuity.
|
Normally funded by employee and employer contributions under the EPF framework.
|
|
Build-up
|
Benefit is calculated when it becomes payable, based on applicable wages and service.
|
Account balance builds through contributions and credited interest.
|
|
Usual eligibility
|
Regular employees generally need five years of continuous service, subject to statutory exceptions.
|
Membership and contributions depend on establishment and employee coverage under EPF rules.
|
|
Fixed term employees
|
Eligible after one year under the fixed term contract, according to the official Labour Codes FAQ.
|
Covered under the applicable EPF rules without gratuity’s five-year condition.
|
|
Job change
|
Normally settled by the employer when payable; prior service does not automatically move to an unrelated employer.
|
UAN supports transfer or consolidation across covered employment.
|
|
Payment access
|
Generally payable on termination events specified by law.
|
Transfer, final settlement, and specified advances depend on scheme conditions.
|
|
Tax
|
Depends on employee category, limits, and prevailing tax law.
|
Depends on contribution, interest, and withdrawal conditions under prevailing tax law.
|
How does gratuity work in 2026?
Under the Code on Social Security, 2020, brought into effect on 21 November 2025, gratuity is payable on specified events such as superannuation, resignation, termination, death, disablement, and expiry of fixed term employment. The service condition and method can vary with the employee category and facts.
For regular employees, five years of continuous service is ordinarily required. That minimum is not required when employment ends because of death, disablement, expiry of fixed term employment, or another notified event. The Ministry of Labour clarified in March 2026 that a fixed-term employee is eligible after completing one year under the contract.
For a monthly rated employee, a commonly used statutory formula is: last drawn eligible wages x 15/26 x completed years of service. A part of a year exceeding six months is generally counted as a completed year. Special rules apply to seasonal work and some other cases.
Example: If eligible last drawn monthly wages are Rs 50,000 and countable service is 10 years, the indicative amount is Rs 50,000 x 15/26 x 10 = about Rs 2,88,462. This is an illustration, not a payroll determination. The legal wage base, service record, establishment rules and notified ceiling must be checked.
How does EPF work in 2026?
EPF is a monthly contribution-based social security benefit for covered establishments and members. EPFO states that the usual contribution rate is 12% of basic wages and dearness allowance from the employee and twelve percent from the employer. The employer share may be allocated between EPF and the Employees Pension Scheme as applicable.
The statutory wage ceiling, excluded-employee rules, and voluntary contributions can affect the actual contribution shown on a payslip. An employee should therefore compare the payslip deduction with the EPFO passbook and ask payroll to explain the wage base, employer allocation, and any pension component.
A UAN helps preserve one member identity across covered jobs. On changing employment, linking the new member ID and transferring the balance can consolidate service records and reduce the risk of fragmented accounts. Final withdrawal is not automatically the right step at every job change. Eligibility and tax consequences should be checked first.
How did the new labour codes change the comparison?
The labour codes took effect across India on 21 November 2025. The Code on Social Security now governs gratuity and retains a distinct EPF framework. The common definition of wages also limits excluded allowances: if specified exclusions exceed 50% of total remuneration, the excess is added back for statutory calculations.
This rule may increase the wage base used for certain social security calculations where allowances previously formed a large part of remuneration. It does not mean every employee’s PF or gratuity will double. The outcome depends on salary structure, coverage, contribution restrictions, service, and implementing rules.
What happens to each benefit when you change jobs?
EPF is designed to move with the members. Use the same UAN, verify KYC details, ensure the date of exit is recorded, and initiate or confirm transfer where required. Do not create multiple UANs intentionally. If records do not match, use the EPFO grievance or correction process. Gratuity is linked to service with the employer or qualifying establishment.
If you leave before satisfying the applicable condition, gratuity may not be payable for that stint unless an exception applies. A transfer within a group does not guarantee continuity by itself. The employment contract, establishment identity and service records matter.
Are gratuity and EPF taxable?
Tax cannot be reduced to a single yes or no answer. Gratuity exemption depends on employee category, the amount received, the statutory calculation, and the prevailing exemption ceiling. EPF treatment depends on factors such as recognised-fund status, duration, and reason for withdrawal, employee contributions, and taxable interest rules.
As of this update, the notified maximum gratuity under the labour framework is Rs. 20 lakh. That legal payment ceiling should not be described as a universal tax-free entitlement. The tax exemption available to a particular recipient may be lower and is governed by the applicable Income Tax Act, 2025 provisions and rules.
Under current tax rules, interest attributable to an employee’s annual contribution above Rs. 2.5 lakh is generally taxable where the employer also contributes. A higher threshold can apply where there is no employer contribution. Employer contributions across specified retirement funds can also trigger tax consequences above the prescribed aggregate limit. Obtain tax advice for your facts.
Which benefit should you use for retirement planning?
Treat both as inputs, not a complete retirement plan. EPF may provide a portable accumulation during the working years. Gratuity may provide lumpsum when employment ends after eligibility is met. Neither is known with certainty years in advance because wages, service, law, withdrawals, and contribution history may change.
A practical review starts with current evidence. Download the EPF passbook, verify nominations, retain appointment and relieving letters, ask HR for the gratuity policy, and estimate benefits under conservative assumptions. Then compare the projected total with essential retirement expenses, emergency reserves, health costs, and existing life cover.
How can ABSLI support employers?
ABSLI offers group retirement benefit solutions for employers that may need to fund and administer employee benefit liabilities. The suitability, accounting treatment, terms, charges, and Insurance features depend on the selected solution and governing documents. Employers should review the applicable product materials and obtain professional advice before acting.
What should you check on your payslips and records?
- Confirm that the UAN and EPF member ID are correct and that deposits appear in the EPFO passbook.
- Check the basic wages and dearness allowance used for EPF and ask how the employer share is allocated.
- Keep documents proving joining date, exit date, wage history, and continuity of service.
- File and update separate nominations for EPF and gratuity through the applicable channels.
- Ask HR whether you are engaged on a fixed term contract and retain the written contract.
- Before withdrawal or tax filing, verify the latest EPFO, labour ministry, and income tax rules.
September 16, 2026
5 mins read
Table of Contents
ENQUIRE NOW
