The five-year rule is an important part of gratuity eligibility, but it does not apply in every situation. Under the current gratuity provisions, five years of continuous service is generally required for eligible employees, but exceptions apply in cases such as death, disablement, and expiry of a fixed-term employment contract. The Labour Codes came into effect from November 21, 2025, and the Ministry of Labour and Employment has clarified that the revised gratuity calculation applies prospectively from this date.
So, if you are approaching five years of service, considering a job change or working on a fixed-term contract, it is worth understanding which rule applies to your situation.
Why is 5 years considered important for gratuity?
For employees covered by the applicable gratuity provisions, completing five years of continuous service generally establishes eligibility for gratuity when employment ends through circumstances such as resignation, retirement, or superannuation. However, five years is not a universal requirement. The current Labour Ministry FAQs specifically state that the requirement does not apply in cases including death, disablement, and expiry of a fixed-term employment contract.
This distinction matters if you decide whether leaving an organisation before completing five years will affect your gratuity entitlement.
What happens if you leave your job before completing 5 years?
If you resign before completing five years of continuous service, you generally will not become eligible for statutory gratuity under the standard five-year rule. However, do not assume that every employee who has less than five years of service is automatically excluded. The circumstances in which employment ends matter.
For example, the five-year requirement does not apply in cases of death or disablement, and separate provisions apply to fixed-term employees. If you are close to completing five years, check your exact service period and employment terms before making a decision.
Does the 5-year gratuity rule apply to fixed-term employees?
Not in the same way. Under the current Labour Code provisions, a fixed-term employee can become eligible for gratuity after completing one year of service from the start of the contract. The Ministry of Labour and Employment has clarified that this applies to fixed-term employees directly engaged by the employer. This is one of the significant changes to understand if your employment is structured as a fixed-term contract rather than regular employment.
Does the 5-year rule apply if an employee dies or becomes disabled?
No. The five-year continuous service requirement is not applicable in cases of death or disablement. This means gratuity can become payable even if the employee has not completed five years of service, subject to the applicable provisions. In the event of the employee’s death, the gratuity is paid to the nominee or legal heirs, as applicable. The amount is determined based on the employee’s eligible service and wages under the applicable gratuity provisions.
This is an important exception to the standard five-year rule. Therefore, gratuity eligibility should not be determined solely by asking whether an employee has completed five years. The reason for termination of employment and the employee’s circumstances also matter.
What changed for gratuity from November 21, 2025?
The Labour Codes introduced changes that affect how gratuity is determined, including the definition of wages used for calculation and specific provisions for fixed-term employees. The Ministry has clarified that the new gratuity calculation applies prospectively from November 21, 2025, rather than retrospectively to the entire period of employment. This means employees should distinguish between service completed before and after the implementation date when understanding how the revised calculation applies.
How is gratuity calculated after the new labour codes?
For every completed year of service, or part of a year exceeding six months, gratuity is calculated at 15 days' wages for each completed year of service, based on the last drawn wages, subject to the applicable rules. For a monthly-rated employee, the commonly used formula is:
Gratuity = Last drawn wages × 15/26 × completed years of service
For example, if the applicable last drawn wages are ₹1,00,000 and the employee has completed 10 years of service:
₹1,00,000 × 15/26 × 10 = approximately ₹5.77 lakh
The actual amount will depend on the wages considered under the applicable provisions and the employees’ service details.
Which salary is used to calculate gratuity?
Gratuity is not necessarily calculated on your entire monthly salary. The Social Security Code, 2020 defines “wages” for this purpose, and the Ministry of Labour and Employment has clarified that components outside the specified included and excluded components under Section 2(88) are not considered for gratuity calculation. Therefore, your CTC or gross salary should not automatically be treated as the amount used for calculating gratuity.
What is the tax treatment of gratuity under the Income Tax Act 2025?
The tax treatment of gratuity depends on your employment category and the applicable conditions under the Income-tax Act, 2025. From Tax Year 2026-27, gratuity exemptions are covered under Section 19 of the Income-tax Act, 2025, which consolidates the retirement-benefit exemptions that were earlier covered under Section 10(10) of the Income-tax Act, 1961. The specific gratuity provisions are set out under Section 19(2) read with the relevant provisions of Schedule II.
(Source: https://indiankanoon.org/doc/23042319/)
For example, gratuity received under the Payment of Gratuity Act, 1972 is covered under Section 19(2) and is exempt to the extent permitted under the applicable provisions of that Act. Other gratuity received on retirement, incapacitation or termination is subject to the applicable limits and conditions specified under the new law.
(Source: https://indiankanoon.org/doc/23042319/)
Is ₹20 lakh the maximum tax-free gratuity under the Income Tax Act 2025?
The ₹20 lakh limit continues to be relevant for gratuity tax exemption, but it should not be presented as a universal tax-free limit for every employee. Under the Income Tax Act, 2025, gratuity received under the Payment of Gratuity Act, 1972 is covered under Section 19(5), while death-cum-retirement gratuity is covered under Section 19(2)(g). The amount that can be exempt from tax depends on the employee's category and the conditions applicable to the gratuity received.
For employees covered by the Payment of Gratuity Act, the exemption is subject to statutory calculation and applicable limits. The ₹20 lakh ceiling is therefore relevant when determining the exempt amount, but the actual exemption can be lower depending on the gratuity received and the applicable calculation.
Source: https://taxclue.in/blog/gratuity-taxation-exemption-income-tax-act-2025
How can you calculate your expected gratuity?
Calculating your expected gratuity can help you understand the lumpsum benefit you may receive when you leave employment, retire or become eligible under the applicable gratuity rules. employment. If you want to estimate the amount based on your salary and service period, you can use the ABSLI gratuity calculator. Enter the relevant details to get an illustrative estimate and understand how your salary and completed years of service can affect the gratuity amount.
The calculator should be treated as an estimate rather than the final amount payable. The actual amount generally depends on factors such as your eligible wages, completed years of service and the provisions applicable to your
What should you check before leaving your job?
If you are considering leaving your organisation around the five-year mark, check:
- Your exact date of joining and completed service period
- Whether your employment is regular or fixed term
- The applicable wages used for gratuity calculation
- Whether any exception to the five-year requirement applies
- Your nominee details
- Your employer's gratuity records
- The applicable tax treatment
- The estimated gratuity amount
What can you do with your gratuity after receiving it?
Gratuity can become one of the resources available to you when you retire or leave employment. You may use it for immediate expenses, clear liabilities, maintain an emergency reserve, or add it to your broader retirement resources. If you want to use part of your retirement resources to create future benefits or regular income, you can also explore Pension or Annuity Plans, depending on your retirement needs and the terms of the plan.
October 5, 2026
5 mins read
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