Who Is Eligible and the 4 Years 240 Days Debate

The Payment of Gratuity Act 1972 applies to factories, mines, oilfields, plantations, ports, railways and to shops and establishments with 10 or more employees on any day in the preceding 12 months; once covered, an establishment stays covered. Gratuity is payable to an employee on superannuation, retirement, resignation, death or disablement after five years of continuous service. The five-year condition is waived when the termination is due to death or disablement.

Continuous service for a year means at least 240 days of actual work in that year (190 days for establishments working fewer than six days a week or for work below ground in mines). Days of paid leave, lay-off, maternity leave and absence due to work accidents count as worked. The debate arises in the fifth year: if an employee has completed four years and more than 240 days in the fifth year, is that five years? The Madras High Court held so in a well-known ruling, and some other courts and controlling authorities have followed it, but the position is not uniform across India and the Act's text still says five years.

For an employer the practical answer is to decide and write it down. Many companies pay gratuity at four years and 240 days as a matter of policy, because the litigation cost of refusing is higher than the gratuity. Others hold the strict five-year line. Either is defensible if applied consistently, but silence produces disputes at every exit between 4.5 and 5 years. The gratuity glossary entry summarises the case law positions.

• Establishments with 10+ employees; five years of continuous service; waived on death or disablement
• A year of continuous service = 240 days worked (190 in some cases), counting paid leave
• 4 years + 240 days: accepted by some High Courts, not uniform; policy should say which line you take
• Apply the chosen rule consistently to every exit

The 15/26 Formula With Worked Examples

Gratuity = last drawn basic + DA × 15 ÷ 26 × completed years of service. The 15 represents fifteen days' wages for each year, and the 26 converts a monthly wage to a daily wage on the 26-paid-days basis. A fraction of a year of six months or more counts as a full year; less than six months is dropped. Only basic and dearness allowance count; HRA, allowances, bonus and overtime are excluded, although the Code on Wages 50% add-back applies if the structure is allowance-heavy.

Example 1. Last drawn basic + DA ₹30,000, seven years of service. Fifteen days' wage = ₹30,000 × 15 ÷ 26 = ₹17,307.69. Gratuity = ₹17,307.69 × 7 = ₹1,21,154. Example 2. Same wage, six years and seven months: rounds up to seven years, so gratuity is again ₹1,21,154. Six years and five months rounds down to six years: ₹17,307.69 × 6 = ₹1,03,846.

Example 3. A security guard with basic + DA of ₹16,900 completing exactly five years: ₹16,900 × 15 ÷ 26 = ₹9,750 per year; gratuity ₹48,750. Example 4. A senior manager with last drawn basic + DA of ₹1,50,000 and 25 years: ₹86,538.46 × 25 = ₹21,63,462, which exceeds the statutory ceiling and is capped at ₹20,00,000 unless the employment contract or company policy provides for more. Test other cases in the gratuity calculator.

• Formula: (basic + DA) × 15 ÷ 26 × completed years; six months or more rounds up
• ₹30,000 × 15/26 × 7 = ₹1,21,154; six years five months gives ₹1,03,846
• ₹16,900 × 15/26 × 5 = ₹48,750 for a guard at five years
• Only basic + DA count; result capped at ₹20 lakh unless the contract is more generous

The ₹20 Lakh Ceiling and Tax Exemption

The statutory maximum gratuity under the Act is ₹20 lakh. An employer may pay more under a contract, settlement or policy, but is not obliged to. For employees covered by the Act, gratuity received is exempt from income tax up to ₹20 lakh under section 10(10) of the Income-tax Act; any excess paid under a more generous policy is taxable as salary in the year of receipt.

The ₹20 lakh exemption is a lifetime limit across employers. An employee who received ₹8 lakh tax-free from a previous employer has ₹12 lakh of exemption left for the next gratuity. Payroll should ask leavers to declare earlier exempt gratuity in the exit form so that TDS on the final settlement is correct. Government employees have separate rules and are outside this discussion.

For employees not covered by the Act (for example in establishments below the 10-employee threshold that pay gratuity voluntarily) the tax exemption is computed on a different formula using half a month's average salary for each completed year, also subject to the ₹20 lakh limit. Your accountant should confirm which formula applies before the final settlement is processed.

• Statutory ceiling ₹20 lakh; more can be paid by contract, and the excess is taxable
• Exempt up to ₹20 lakh under s.10(10) for employees covered by the Act; lifetime limit
• Collect a declaration of earlier exempt gratuity at exit
• Non-covered establishments paying voluntarily use a different exemption formula

Gratuity in CTC: The 4.81% Provision

Fifteen days out of 26 for each year equals 15 ÷ 26 ÷ 12 of monthly basic + DA per month, which is 4.81%. That is why offer letters show gratuity as 4.81% of basic in the CTC. On a basic + DA of ₹30,000 the provision is about ₹1,442 per month, or ₹17,308 per year, matching the fifteen days' wage in the formula.

Showing gratuity in CTC is lawful but must be honest. The employee receives nothing until they qualify, and an employee who leaves at three years gets no gratuity even though CTC included it for 36 months. State this plainly in the offer letter, and never deduct the provision from the employee's salary: gratuity is an employer liability, and any deduction from wages towards it is not permitted.

For accounting, companies either provision monthly on the payroll books or fund a group gratuity scheme with an insurer, which also gives a tax deduction for the contribution. The provisioning figure should be recomputed whenever basic changes, because gratuity is on last drawn wage rather than on the wages during the years of service, so a revision late in a long career increases the whole liability. The salary structure guide shows the provision in two worked CTC break-ups.

• 4.81% = 15 ÷ 26 ÷ 12; ₹30,000 basic + DA gives about ₹1,442 per month
• Disclose in the offer letter that gratuity is payable only on eligibility
• Never deduct gratuity from the employee's wages
• Recompute the liability on every basic revision; last drawn wage drives the payout

Payment Timeline, Nomination and Forfeiture

Gratuity becomes payable on the date employment ends and must be paid within 30 days of that date. If it is not, the employer owes simple interest at the rate notified by the central government from the due date until payment, unless the delay was the employee's fault. The employer should determine the amount and give written notice to the employee and the controlling authority; employees apply in Form I, nominees in Form J and legal heirs in Form K.

Every employee who has completed one year should submit a nomination in Form F, and the nomination should be updated on marriage. In a death case, gratuity is paid to the nominee or heirs regardless of length of service, and it is often the family's most immediate financial support, so keeping nominations current is not a formality.

Forfeiture is narrow. Under section 4(6), gratuity may be forfeited to the extent of the damage or loss caused if the employee's services were terminated for a wilful act, omission or negligence causing damage to the employer's property; it may be forfeited wholly or partly if services were terminated for riotous or disorderly conduct or violence, or for an offence involving moral turpitude committed in the course of employment. Termination on those grounds must be established through a proper enquiry; an employer cannot simply withhold gratuity because the employee left without notice or owes an advance.

• Pay within 30 days of separation; interest runs after that
• Forms F (nomination), I (employee claim), J (nominee), K (legal heir)
• Forfeiture only for proven damage, riotous conduct or moral turpitude offences, after enquiry
• Notice-period shortfall or pending advances are not grounds to withhold gratuity

Gratuity for Contract, Security and Outsourced Staff

For contract labour, the contractor is the employer under the Payment of Gratuity Act and is primarily liable to pay gratuity to workers who complete the qualifying service with the contractor. A guard who has served the same agency for six years across three client sites has a gratuity claim on the agency, not on the sites. Courts have in some cases directed principal employers to pay where the contractor could not be found, and then recover from the contractor, so clients should verify the agency's gratuity arrangement in due diligence.

Agencies should therefore price gratuity into billing at 4.81% of basic + DA, in the same way as PF and ESI, and either provision it or fund a group scheme. Clients who refuse to pay a gratuity component while requiring guards to be retained for years are creating an unfunded liability that surfaces at the first long-service exit. The contract labour compliance guide for principal employers covers the client side of the due diligence.

Frequent movement of guards between agencies, often at the client's instance when a contract changes hands, is the common way gratuity is lost. Where the incoming agency absorbs the guards, a written arrangement on whether past service is recognised protects everyone. Attend Mitra's employee database keeps joining dates, deployment history across sites and document records per guard, and the payroll module carries basic + DA per employee, which is what the gratuity computation at exit needs; the payment itself and any Form filing remain with the agency.

• Contractor is the employer and primarily liable; principal employers have been made to pay in default cases
• Bill and provision gratuity at 4.81% of basic + DA alongside PF and ESI
• Agency changeovers are where service continuity and gratuity get lost; document absorption terms
• Keep joining dates, deployment history and wage components per guard