Most employees who resign, retire, or reach superannuation must complete at least five years of continuous service. The five-year condition does not apply when employment ends because of death, disablement, expiry of qualifying fixed-term employment, or another event notified by the Central Government. Eligibility depends on the employment arrangement and the reason service ended, not merely the number of months worked.
What changed under the new labour framework?
India brought the Code on Social Security, 2020 into force on 21 November 2025. Its gratuity chapter preserves the general five-year service requirement while expressly recognising exceptions for death, disablement, and fixed-term contract expiry. The framework also applies the newer statutory definition of wages to gratuity calculations from the commencement date.
This distinction matters because “less than five years” is not a single eligibility category. A permanent employee resigning after three years and a fixed-term employee whose written contract expires after one year may have different outcomes. First identify the type of employment and the event that ended it, then apply the calculation.
Who can receive gratuity before completing five years?
The clearest statutory exceptions are employees whose service ends due to death or disablement and employees whose fixed-term contract expires. Working journalists have a separate three-year threshold. An employer may also provide better gratuity terms through an award, agreement, or employment contract.
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Situation
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Is five years required?
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Key condition
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Ordinary resignation, retirement or superannuation
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Generally yes
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At least five years of continuous service, subject to a legally supportable continuous-service assessment.
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Death
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No
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Amount is payable to the nominee or legal heirs and calculated pro rata.
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Disablement due to accident or disease
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No
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Five-year condition is waived.
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Expiry of fixed-term employment
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No
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The employment must genuinely be fixed term. Official guidance states payment on contract termination after one year of service.
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Working journalist
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Three-year threshold
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Special statutory threshold applies.
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Better employer terms
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Depends on terms
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An award, agreement, or contract may give a more favourable benefit.
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A short assignment, outsourced role or informal description as a “contract employee” does not by itself prove fixed-term status. Check the written appointment terms, who the legal employer is and whether the contract period actually expired.
Does working 4 years and 240 or 190 days automatically qualify?
No automatic rule should be assumed. Section 54 uses 240 days, or 190 days for employees below ground in a mine or in an establishment that works fewer than six days a week, to test whether an employee is deemed to be in continuous service for a one-year period. It also specifies 120-day and 95-day tests for six months. These day count provisions help decide whether a period counts as continuous service. They do not contain a standalone statement that every employee who works 4 years and 190 or 240 days has completed the five-year eligibility condition.
Court decisions under the earlier law have not always been uniform, and facts such as the establishment’s work pattern, interruptions, and applicable jurisdiction matter. An employee close to five years should obtain a written HR calculation and, if disputed, advice from the competent labour authority or a qualified professional.
How is gratuity calculated for an eligible employee?
For a monthly-rated employee, gratuity is generally calculated as: last-drawn monthly wages x 15 / 26 x eligible years of service. Each completed year is counted, and a part of a year exceeding six months is ordinarily counted as another year. Fixed-term and deceased-employee gratuity is paid pro rata. “Wages” is a statutory figure, not automatically the employee’s basic salary, gross salary or exactly 50% of CTC.
The labour-code wage definition includes specified remuneration and may add back excluded allowances when they exceed the permitted proportion. Payroll should calculate the statutory wage base from the employee’s actual salary structure.
Example for a fixed-term employee
Assume an employee’s qualifying last-drawn monthly wages are Rs. 50,000 and a two-year fixed-term contract expires. Using the monthly-rated formula:
Rs. 50,000 x 15 / 26 x 2 = Rs. 57,692 approximately.
This is an illustration, not a payroll determination. The employer must first confirm the statutory wage figure, eligible service, contract status and whether any more favourable employment terms apply. The overall statutory gratuity ceiling is currently Rs. 20 lakh.
What happens if an employee dies five years before?
The five-year condition does not apply. Gratuity is calculated for the actual eligible service and paid to the recorded nominee. If no valid nomination exists, it is paid to the legal heirs. Where a beneficiary is a minor, the minor’s share is handled through competent authority in the prescribed manner. Employees should review their nomination after marriage, divorce, the birth of a child or another material family change.
Nominees or heirs should keep the death certificate, identity and relationship documents, employment details, and bank information ready for the claim process.
What should you check before claiming gratuity?
Start with documents rather than assumptions. Confirm the legal employer, appointment type, start and end dates, reason for separation, last-drawn wage components, and nomination record. Then ask the employer for a written eligibility decision and calculation. The code requires gratuity to be paid within 30 days after it becomes payable.
- Review the appointment letter, extensions, and separation letter.
- Collect recent salary slips and the employer’s statutory wage working.
- Check service breaks, paid leave, lay-off periods, and other periods that may count toward continuous service under Section 54.
- Compare statutory entitlement with any more favourable award, agreement, or employment contract.
- If the amount or eligibility is disputed, use the prescribed process before the competent authority and retain copies of all submissions.
Is gratuity taxable?
Tax treatment is separate from eligibility. Section 10(10) of the Income-tax Act governs gratuity exemption, and the applicable ceiling and calculation depend on whether the recipient is a government employee and on the governing employment framework. Current income-tax filing guidance reflects an Rs. 20 lakh exemption ceiling for many non-government categories, while government categories may be treated differently.
Tax laws, notifications, and individual facts can change the result. Before filing a return, check the current rule for the relevant assessment year or consult a qualified tax professional.
How can ABSLI help with retirement planning?
ABSLI provides Life Insurance and Retirement Solutions. Gratuity is an employer-paid statutory benefit and is not a substitute for personal retirement planning. If you consider any Insurance product, review the benefit illustration, policy term, exclusions, charges, surrender conditions, risk factors, and sales prospectus before deciding. Product suitability depends on your goals, cash flow, and protection needs.
September 17, 2026
5 mins read
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