Yes, gratuity can apply to a small company in India. Company size, turnover, and funding do not decide coverage. For a shop or establishment, the key test is whether it employed 10 or more employees on any day in the preceding 12 months. Certain establishments, including factories and mines, fall within the gratuity chapter regardless of this shop-and-establishment threshold.
India’s gratuity framework changed on 21 November 2025, when the Code on Social Security, 2020 came into effect. Employees and employers should therefore check current coverage and eligibility under the code, along with applicable rules, government notifications, and any more favourable employment terms.
When does gratuity law apply to a small company?
For a small business operating as a shop or establishment, the gratuity chapter applies if it has employed 10 or more employees on any day during the preceding 12 months. The law looks at employee strength, not whether the business informally calls itself a startup, micro-enterprise, family business, or small company.
The same chapter also applies to every factory, mine, oilfield, plantation, port, and railway company. Appropriate governments may notify additional shops or establishments. Because the legal category of an establishment can matter, an employer unsure about coverage should obtain advice based on its activity, location and workforce records.
### A quick coverage test
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Question
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What it generally means
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Is the employer a factory, mine, oilfield, plantation, port, or railway company?
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The gratuity chapter applies to these listed categories.
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Is it a shop or establishment that had 10 or more employees on any day in the preceding 12 months?
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The gratuity chapter applies.
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Has it always remained below 10 employees and is it not otherwise covered or notified?
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Statutory coverage may not apply, but employment terms can still provide a gratuity benefit. Obtain case-specific advice.
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Do not rely only on today’s headcount. Payroll, attendance, and employment records for the preceding 12 months can determine whether the threshold was crossed.
Which employees are eligible to receive gratuity?
Coverage of the establishment and eligibility of an employee are separate questions. Once the establishment is covered, gratuity is generally payable when employment ends after at least five years of continuous service because of superannuation, retirement, resignation, or another qualifying event under Section 53.
The five-year condition is not required when employment ends due to death, disablement caused by accident or disease, expiry of fixed-term employment, or another event notified by the Central Government. In the event of death, payment goes to the nominee or, where no nomination exists, to the legal heirs, subject to the Code’s process for a minor beneficiary.
Working journalists have a three-year service condition under the special provision in Section 53. Employees should not assume that every break in attendance ends continuous service. Section 54 includes specified interruptions such as sickness, accident, leave, lay-off, strike, lockout, and cessation of work not caused by the employee.
Do fixed-term employees have to complete five years?
No. The five-year requirement does not apply when fixed-term employment expires. The Ministry of Labour and Employment clarified in March 2026 that a fixed-term employee becomes eligible for gratuity after completing one year under the contract. An 11-month fixed-term engagement does not meet that one-year condition.
This exception is specific to genuine fixed-term employment. It should not be treated as a general one-year gratuity rule for every permanent, probationary, temporary, or contractual worker. The employment contract and actual arrangement should be checked before applying the exception.
How is gratuity calculated in 2026?
For each completed year of service, or a part exceeding six months, gratuity is generally 15 days’ wages based on the employee’s last-drawn wage rate. For a monthly rated employee, the statutory calculation is last-drawn monthly wages divided by 26, multiplied by 15, multiplied by eligible years of service.
Illustrative formula
Gratuity = Last-drawn monthly wages × 15 ÷ 26 × eligible years of service
Assume last-drawn monthly wages of ₹30,000 and six completed years of eligible service:
₹30,000 × 15 ÷ 26 × 6 = ₹1,03,846.15
The example is illustrative and rounded to two decimal places. Actual entitlement depends on the statutory wage definition, service record, employment category, applicable notifications, and any better terms in an award, agreement, or employment contract. Under the labour codes, excluded allowances above the prescribed 50% limit are added back to wages for statutory calculations. The Ministry’s January 2026 FAQ states that the current maximum gratuity is ₹20 lakh.
Piece-rated, seasonal, and fixed-term employees have specific calculation rules. Payroll teams should use the applicable statutory method rather than applying the monthly-rated formula to every worker.
When must the employer pay gratuity?
The employer must determine the amount when gratuity becomes payable, issue the required notice and arrange payment within 30 days. Delayed payment can attract simple interest, subject to the exception set out in Section 56 of the code.
An employee should preserve the appointment letter, contract, payslips, employee identification, nomination details, resignation or termination communication, relieving letter, and proof of service dates. If there is a dispute about coverage, eligibility, amount, or the person entitled to receive payment, the matter may be taken to the competent authority under the code. This is legal information, not a substitute for advice on an individual dispute.
What should an employee do if the company says it is too small?
Ask the employer for the legal basis of the decision and verify the establishment’s highest employee count during the preceding 12 months. A current headcount below 10 does not answer whether the threshold was reached earlier in that period. Also check whether the employer falls within an automatically covered category.
Then compare your joining and exit dates, type of employment, reason for exit, and continuous service record with Sections 53 and 54. Review the appointment letter, employee handbook, settlement policy, award, or contract because these documents may provide better gratuity terms than the statutory minimum.
If the issue remains unresolved, seek guidance from the appropriate labour authority or a qualified legal professional. The Ministry’s Samadhan channel also provides a route for labour-related claims and grievances.
How can gratuity fit into retirement planning?
Gratuity is usually a one-time employment benefit, not a complete retirement plan. Before using it, first separate near-term needs from longer-term goals, consider liabilities, and emergency liquidity, and assess how much regular income may be needed after work ends. Any financial product should be evaluated on suitability, risks, costs, liquidity and policy terms.
Aditya Birla Sun Life Insurance Company Limited provides retirement information and tools on its website. Educational tools can help a reader estimate needs, but their results are illustrative and do not replace personalised financial, legal or tax advice.
Key take
A small company employee may be covered by gratuity law. For a shop or establishment, the central coverage test is whether it employed 10 or more employees on any day in the preceding 12 months. Eligibility then depends on service, employment type, and the reason employment ended. Check records and current official guidance rather than relying on the label “small company”.
September 10, 2026
5 mins read
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