Gratuity Rules – In India, gratuity is one of the most anticipated end-of-service benefits, especially for salaried employees. But many workers are confused about whether they are eligible for gratuity if they have worked for less than five years. With job switches becoming common and startups booming, the five-year mark often remains unfulfilled. So what do the official rules really say? This article breaks down gratuity eligibility, legal exceptions, recent updates, and what employees should know if they’ve served less than five years in an organization.
What Is Gratuity and Why Is It Important?
Gratuity is a one-time financial benefit paid by an employer to an employee as a mark of appreciation for long-term service. Governed by the Payment of Gratuity Act, 1972, it becomes payable upon resignation, retirement, death, or disability—typically after completing five years of continuous service. It serves as a key financial cushion for employees and is tax-free up to ₹20 lakh.
Key features:
- Paid at the time of retirement, resignation, death, or disablement.
- Applicable to employees who have completed at least 5 years of continuous service.
- Tax-free up to ₹20 lakh as per current Income Tax rules.
Basic Conditions for Gratuity Eligibility
To qualify for gratuity under the Payment of Gratuity Act, an employee must have completed at least 5 years of continuous service in an organization that employs 10 or more people. The benefit is available to salaried individuals upon resignation, retirement, termination (except for misconduct), death, or permanent disability. However, in cases of death or disablement, the 5-year requirement is waived.
To be eligible under the Payment of Gratuity Act, the employee must meet the following criteria:
- Should be a salaried employee (full-time or part-time).
- Employer must have 10 or more employees.
- Minimum 5 years of continuous service is required (some exceptions apply).
- Gratuity is paid upon resignation, retirement, termination (except for misconduct), death, or disablement.
Can You Get Gratuity for Less Than 5 Years?
According to Section 4 of the Payment of Gratuity Act:
- General Rule : Employees are eligible only after completing 5 years of continuous service.
- Exception 1 – Death or Disability : If the employee dies or is disabled, gratuity is payable even before completing 5 years.
- Exception 2 – Continuous Service of 4 Years and 240 Days : Several court rulings have interpreted “continuous service” to include 4 years and 240 days as valid for gratuity in specific cases.
Court Judgements Supporting Less Than 5 Years Rule
Some landmark decisions by Indian courts have changed the perception around the 5-year rule:
| Case Title | Court | Verdict Summary |
|---|---|---|
| Mettur Beardsell Ltd. vs. Regional Labour | Madras High Court | Gratuity payable after 4 years 240 days |
| Surendra Kumar Verma vs. Central Govt. | Supreme Court | Gratuity not denied on technicality of few days |
| Indian Hume Pipe Co. Ltd. vs. Its Workmen | Bombay High Court | Ruled in favor of 4 years 240 days service count |
| S.M. Saiyed vs. New India Industries Ltd. | Gujarat High Court | Allowed gratuity for slightly under 5 years service |
| Mohan Lal vs. Bharat Electronics Ltd. | Delhi High Court | Payment directed despite incomplete 5-year term |
| Municipal Corporation of Delhi Case | Delhi High Court | Rejected rigid application of 5 years clause |
| T. Prem Sagar vs. State of Punjab | Punjab & Haryana HC | Recognized service of 4 years 10 months as eligible |
| LIC Staff Association Case | Karnataka HC | Gratuity extended to employees with 4 yrs 8 months |
Gratuity Calculation for Employees
Gratuity is calculated using the following formula:
Gratuity = (Last Drawn Salary × 15 × Number of Completed Years of Service) / 26
| Component | Description |
|---|---|
| Last Drawn Salary | Basic + Dearness Allowance |
| 15 | Number of days considered per year |
| Completed Years of Service | Years rounded down to the nearest year |
| 26 | Number of working days in a month |
Example:
If you worked for 4 years and 9 months and earned ₹30,000 as basic + DA:
Gratuity = (30,000 × 15 × 5) / 26 = ₹86,538
When Employers Still Deny Gratuity
Despite favorable court judgments, some employers may still deny gratuity before 5 years due to:
- Strict interpretation of the Act.
- No internal HR policy updates.
- Lack of awareness or legal pressure.
- Misclassification of service period (e.g., probation).
What You Should Do If Denied
If you believe you’re eligible but denied gratuity, here’s what you can do:
- Request HR for gratuity details and reason for denial.
- Collect documents: appointment letter, payslips, resignation letter, etc.
- File a complaint with the Labour Commissioner.
- Approach a labor lawyer or file a case under the Payment of Gratuity Act.
Gratuity Eligibility Table – Quick Reference
| Service Duration | Gratuity Eligibility | Conditions |
|---|---|---|
| Less than 1 year | No | Not eligible under the Act |
| 1–4 years | No | General rule denies eligibility |
| 4 years 240+ days | Yes (Case-dependent) | Based on High Court/Supreme Court rulings |
| 5+ years | Yes | Standard eligibility |
| Death/Disablement | Yes | No service minimum needed |
| Contractual Workers | Varies | Depends on nature of employment |
| Govt Employees | Separate Rules | Governed by service rules |
Common Misconceptions About Gratuity
- Myth : Gratuity is paid monthly like PF.
Fact : It’s a one-time payout at end of employment. - Myth : You can’t get gratuity if you resign.
Fact : Resignation doesn’t disqualify you if other conditions are met. - Myth : Only government employees are eligible.
Fact : Any employee under the Act is eligible.
While the law technically mandates a minimum of five years of service for gratuity, judicial interpretations have made space for exceptions, particularly in cases where the employee has completed over 4 years and 240 days. Additionally, if the separation is due to death or permanent disability, the 5-year requirement is waived entirely.
FAQs about Gratuity Rules
- Can I get gratuity if I worked for 4 years and 10 months?
Yes, based on several court rulings, you may be eligible. - Is gratuity applicable if I resign before 5 years?
Normally no, unless you’ve completed 4 years and 240+ days. - What if I’m terminated for no fault of mine before 5 years?
You may still be eligible depending on the cause and duration. - Does gratuity apply to private sector employees?
Yes, if the organization has more than 10 employees and you meet the service condition. -
Is it mandatory for employers to pay gratuity?
Yes, as per the Payment of Gratuity Act, it is a legal obligation.