Gratuity Rules 2025: What Every HR Manager Needs to Know

Gratuity is a statutory retirement benefit and a key compliance responsibility for HR teams in India. As workforce mobility increases and regulatory scrutiny tightens, understanding gratuity rules in 2025—especially the 5-year eligibility rule and upcoming discussions around reforms—is critical for HR managers.

This guide breaks down gratuity rules, calculations, eligibility, and what HR professionals should watch out for in 2025.

What Is Gratuity Under Indian Labour Law?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long-term service.

It is governed by the Payment of Gratuity Act, 1972, which applies to:

• Factories, mines, oilfields, plantations
• Shops and establishments with 10 or more employees
• Once applicable, it continues even if headcount drops below 10

The 5-Year Rule Explained

Standard Eligibility Rule

An employee becomes eligible for gratuity if they have completed:

• 5 years of continuous service, and
• The separation is due to:
  • Resignation
  • Retirement
  • Superannuation
  • Termination (not due to misconduct)

Important Exception

Gratuity is payable before 5 years in cases of:

• Death of the employee
• Permanent disablement due to accident or illness

👉 In these cases, no minimum service requirement applies.

What Counts as “Continuous Service”?

An employee is considered in continuous service even if work is interrupted due to:

• Approved leave
• Sickness or accident
• Layoff or strike (not illegal)
• Maternity leave

🔹 Courts have also recognized 4 years and 240 days as qualifying service in certain cases—an important point HR managers must note.

Gratuity Calculation Formula (2025)

For Employees Covered Under the Act

Gratuity =
(Last Drawn Salary × 15 × Years of Service) ÷ 26

Where:

• Salary = Basic + Dearness Allowance
• 15 = wages for 15 days per year
• 26 = working days in a month

Example

• Last drawn salary: ₹30,000
• Years of service: 7

Gratuity = (30,000 × 15 × 7) ÷ 26 = ₹1,21,153

Maximum Gratuity Limit (2025)

• Current statutory ceiling: ₹20 lakh
• Any amount above this is considered ex-gratia, unless employer policy states otherwise

Tax Treatment of Gratuity

Tax-Free Gratuity

• Government employees: Fully exempt
• Private-sector employees:
  • Exempt up to ₹20 lakh, subject to conditions

The least of the following is tax-exempt:

• Actual gratuity received
• ₹20 lakh
• Calculated gratuity as per formula

Potential Changes HR Managers Should Watch in 2025

While no official amendment has been notified yet, discussions and industry expectations include:

• 🔹 Reduced eligibility period (from 5 years to 3 or 4 years)
• 🔹 Alignment with new labour codes
• 🔹 Improved clarity on fixed-term employee eligibility
• 🔹 Standardization of gratuity treatment for gig and contract workers

📌 HR teams should closely monitor notifications related to the Code on Social Security.

HR Compliance Checklist for Gratuity

• ✔ Maintain accurate service records
• ✔ Display gratuity policy in employee handbook
• ✔ Ensure timely payment (within 30 days of separation)
• ✔ Calculate interest for delayed payments
• ✔ Budget gratuity liability in financial planning

Frequently Asked Questions (FAQs)

1. Is gratuity mandatory for all employers?

Yes, for establishments covered under the Payment of Gratuity Act, gratuity is a statutory obligation.

2. Can an employer deny gratuity?

Only in cases of termination due to proven misconduct involving moral turpitude, violence, or theft.

3. Are fixed-term employees eligible for gratuity?

Yes, if they complete 5 years of continuous service, or earlier in case of death or disablement.

4. Is gratuity applicable to contract employees?

Yes, if they are on the rolls of the employer and meet eligibility conditions.

5. What happens if gratuity is not paid on time?

The employer must pay interest for delays beyond 30 days.

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