TL;DR
- An employee becomes eligible for gratuity after five years of continuous service with a covered establishment.
- Chapter V of the Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972 on 21 November 2025 and now governs eligibility, computation and payment.
- The five-year condition does not apply on death, disablement, expiry of a fixed-term contract or a notified event, and working journalists qualify at three years.
Quick Answer: An employee becomes eligible for gratuity after five years of continuous service with a covered establishment. Gratuity is now governed by Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972 on 21 November 2025. The five-year condition is waived in four situations, including death, disablement and expiry of a fixed-term contract.
The qualifying condition has not changed, but the statute behind it has. Obligations settled under the Payment of Gratuity Act, 1972 until 20 November 2025 now arise under sections 53 to 58 of the Code on Social Security, 2020. Two consequences follow: the circumstances that waive the five-year condition have grown from two to four, and the wage base is wider.
| Eligibility question | Position under the Code on Social Security, 2020 |
|---|---|
| Qualifying service | Five years of continuous service |
| Working journalists | Three years, per the first proviso to section 53(1) |
| Death or disablement | No minimum service required |
| Expiry of a fixed-term contract | No minimum service required, paid pro rata |
| Rate | 15 days' wages for each completed year of service |
| Maximum amount | ₹20 lakh, as notified |
| Payment deadline | Within 30 days of becoming payable |
Who Is Eligible for Gratuity?
An employee qualifies for gratuity after five years of continuous service with an establishment covered by Chapter V. Gratuity becomes payable on superannuation, on retirement or resignation, on death or disablement due to accident or disease, on termination of the contract period under fixed-term employment, and on any event the Central Government notifies.
Section 2(26) of the Code defines an employee to include a person employed either directly or through a contractor. A person engaged as an apprentice under the Apprentices Act, 1961 is excluded from that definition and therefore earns no gratuity. The exclusion is narrow: a trainee outside that Act may still be an employee. Explanation 1 to section 53 excludes government post holders whose gratuity another Act or rules already governs.
Which Establishments Are Covered?
Chapter V applies to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment in which ten or more employees are employed, or were employed, on any day of the preceding twelve months.
The ten-employee test attaches only to shops and establishments; a factory, mine, oilfield, plantation, port or railway company is covered irrespective of headcount. Once Chapter V applies, section 1(8) keeps it applicable even if headcount later falls below ten.
What Counts as Continuous Service?
Continuous service is a defined concept under section 54, not a count of calendar years. An employee who has actually worked for 240 days in the preceding twelve months is deemed to be in continuous service for that year. The figure is 190 days for an employee working below ground in a mine, or in an establishment that works fewer than six days a week.
| Period being tested | Days actually worked | Reduced figure |
|---|---|---|
| One year | 240 days | 190 days |
| Six months | 120 days | 95 days |
| Seasonal establishment | 75% of days in operation | Not applicable |
Days of lay-off, leave with full wages, absence from temporary disablement caused by employment injury, and maternity leave up to twenty-six weeks all count as days worked.
How Is Gratuity Calculated?
Gratuity is payable at the rate of 15 days' wages for every completed year of service, and for any part of a year in excess of six months. For a monthly-rated employee, Explanation 3 to section 53 sets the method: divide the monthly wages last drawn by 26, then multiply by 15 for each year of service.
Two categories do not use that divisor. A piece-rated employee's daily wage is the three-month average preceding termination, excluding overtime. An employee of a seasonal establishment who is not employed throughout the year receives seven days' wages for each season.
Which Wage Components Enter the Calculation?
Section 2(88) limits wages to basic pay, dearness allowance and retaining allowance, and excludes eleven heads including house rent allowance, conveyance, overtime, commission and the employer's own provident fund contribution.
The first proviso to section 2(88) is what changes the arithmetic. Where the payments under sub-clauses (a) to (i) exceed one-half of all remuneration, the amount above that half is deemed to be remuneration and is added back into wages. Gratuity and retrenchment compensation sit outside that test. A salary structure built on a small basic and large allowances therefore produces a higher gratuity figure than the same structure did before 21 November 2025. The same wages definition drives provident fund liability, which is set out in the guide to the revised EPF wage ceiling.
Does the Five-Year Rule Still Apply Under the Code on Social Security?
Yes. Section 53(1) of the Code on Social Security, 2020 retains five years of continuous service as the general condition. What changed is the number of exits from it.
Under the 1972 Act only death and disablement removed the condition. The second proviso to section 53(1) now removes it in four situations, and the first proviso reduces the period for one class of employee. Commencement of sections 17 to 141, which cover Chapter V, was notified by S.O. 5319(E) dated 21 November 2025.
| Circumstance | Qualifying service required |
|---|---|
| Death | None |
| Disablement due to accident or disease | None |
| Expiry of a fixed-term employment contract | None, paid pro rata |
| An event notified by the Central Government | None |
| Working journalist under the 1955 Act | Three years |
| Better terms under an award, agreement or contract | As agreed, per section 53(5) |
Does Four Years and 240 Days Count as Five Years?
Not on the better reading, and the point is contested. Section 54 deems a year to be continuous service where 240 days were actually worked, which is the hook the contrary claim hangs on. It decides whether a given year counts, not whether four completed years plus a part-year meet a five-year threshold.
Is Gratuity Payable to Fixed-Term and Contract Employees?
Yes to both, under different provisions and with different payers.
How Does Gratuity Work for a Fixed-Term Employee?
A fixed-term employee is engaged under a written contract for a fixed period, as defined in section 2(34). The third proviso to section 53(2) requires the employer to pay gratuity to such an employee on a pro rata basis, and section 53(1)(d) makes expiry of the contract period a payment trigger with no five-year condition. The Code itself prescribes no minimum period. The Ministry of Labour and Employment, in its FAQs on the labour codes, states that eligibility arises on completing one year from the start of the contract.
Who Pays Gratuity for Contract Labour?
Contract labour sit outside fixed-term employment, but section 2(26) includes a person employed through a contractor, so they are within Chapter V. Chapter V does not itself allocate the liability, and the Ministry places it on the contractor rather than the principal employer. Provident fund and state insurance work differently: section 31 reaches an employee employed through a contractor directly. Practical questions are collected in the labour codes FAQs.
What Is the Maximum Gratuity, and How Much Is Exempt from Tax?
The Code sets no figure. Section 53(3) provides that gratuity shall not exceed such amount as the Central Government notifies, and the notified ceiling is ₹20 lakh. That figure was fixed by a notification of 29 March 2018 and is carried forward by section 164(2)(a) of the Code, which saves notifications issued under the repealed enactments.
On the tax side, relief sits in section 19(1) of the Income-tax Act, 2025, which took effect on 1 April 2026. Full deduction with no monetary ceiling is confined to government service: section 19(2)(g) limits it to gratuity under the Central Civil Services (Pension) Rules, 2021 and similar Union, all-India and State schemes. For a private-sector employee the deduction is capped at the amount computed under the gratuity statute.
When Must the Employer Pay, and What Happens on Default?
Section 56(3) requires the employer to arrange payment within 30 days from the date gratuity becomes payable. On delay the employer pays simple interest from the date it became payable to the date of payment, at a rate not exceeding the notified rate for repayment of long-term deposits. Interest is not payable where the delay is the employee's fault and the employer holds written permission from the competent authority.
| Default | Consequence |
|---|---|
| Late payment | Simple interest under section 56(4) |
| Failure to pay gratuity | Imprisonment up to one year, or fine up to ₹50,000, or both |
| Repeat offence after a conviction | Imprisonment of not less than two years and up to three years, and a fine of ₹3 lakh |
Section 53(6) permits forfeiture. Damage or loss to the employer's property through the employee's act, wilful omission or negligence forfeits gratuity to the extent of that loss. Termination for riotous or disorderly conduct, any other act of violence, or an offence involving moral turpitude in the course of employment permits forfeiture in whole or in part. Tracking the gratuity obligation across entities, with its due dates and the evidence each one needs, is what a compliance platform such as LexComply is built to evidence, supported by its labour law assistant.
Common Mistakes to Avoid
- Applying the ten-employee test to a factory. The ten-or-more condition in the First Schedule attaches only to shops and establishments. A factory, mine, oilfield, plantation, port or railway company is covered regardless of headcount.
- Treating four years and 240 days as five years of service. Section 54 decides whether one year counts as continuous service. No provision of the Code aggregates four years and a part-year into the five-year threshold.
- Using the 15/26 divisor for every employee. Explanation 3 to section 53 confines it to monthly-rated employees. A piece-rated employee uses a three-month average excluding overtime; a seasonal employee not engaged year-round gets seven days' wages per season.
- Computing gratuity on basic pay and dearness allowance alone. The first proviso adds back only the excess over one-half of the payments in sub-clauses (a) to (i), not gratuity or retrenchment compensation.
- Reading section 53(5) as optional. An award, agreement or contract giving better gratuity terms prevails, including a shorter qualifying period than five years.
- Reading the contractor's gratuity liability out of the Code. Chapter V does not allocate it; the Ministry places the obligation on the contractor.
Legal Disclaimer
This article is general information on Indian statutory compliance and reflects the position as at 9 October 2026. It is not legal advice, and you should take advice on the facts of a specific case before acting.
