Payment of Gratuity Act Compliance Hub
Everything you need to manage gratuity calculations, eligibility tracking, and compliance under the Payment of Gratuity Act, 1972. Updated for 2025-26 with current limits and rules.
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Gratuity Compliance Dashboard
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Gratuity Calculation Framework
Gratuity Calculation Framework
| Parameter | Covered Under Act | Not Covered Under Act |
|---|---|---|
| Applicability | 10 or more employees | Fewer than 10 employees |
| Eligibility | 5 years continuous service | 5 years (if offered voluntarily) |
| Calculation Formula | 15/26 x Last Salary x Years | 15/30 x Last Salary x Years |
| Salary Component | Basic + Dearness Allowance | Basic + DA (or as per contract) |
| Maximum Gratuity | ₹25,00,000 | No statutory cap |
| Tax Exemption | Up to ₹25,00,000 | Up to ₹25,00,000 |
| Year Rounding | > 6 months = 1 year | As per contract |
| Payment Timeline | Within 30 days | As per contract |
Gratuity Calculation Example
Employee completing 8 years of service with last drawn salary of ₹35,000/month (Basic + DA)
The 26 divisor assumes 26 working days per month. For service exceeding 6 months in the final year, it is rounded up to the next full year. Maximum tax-exempt gratuity is ₹25,00,000.
Gratuity Compliance Timelines
Gratuity Compliance Timelines
| Event / Obligation | Timeline | Form Required |
|---|---|---|
| Gratuity Payment (on superannuation/resignation) | Within 30 days of it becoming due | Form I (Application by employee) |
| Gratuity Payment (on death) | Within 30 days to nominee/legal heir | Form J (Application by nominee) |
| Gratuity Payment (on disability) | Within 30 days of disablement | Form I |
| Nominee Registration | Within 30 days of completing 1 year of service | Form F (Nomination) |
| Change of Nominee | On marriage, birth of child, or death of nominee | Form H (Fresh Nomination) |
| Employer Response to Claim | Within 15 days of receiving application | Form L (Notice of determination) |
| Display of Act Abstract | At all times at workplace | Form U (Abstract of Act in English & local language) |
Understanding Gratuity Compliance in Detail
Who is Covered Under the Gratuity Act?
The Payment of Gratuity Act, 1972 applies to every factory, mine, oilfield, plantation, port, railway, and every shop or establishment with 10 or more employees on any day in the preceding 12 months. Once applicable, the Act continues to apply even if the employee count drops below 10. The Act covers all employees (including contract workers) regardless of designation or wages.
The 5-Year Rule and Exceptions
An employee must complete 5 years of continuous service to be eligible for gratuity. However, this condition is waived in case of death or disablement — gratuity is payable even if the employee has served for less than 5 years. For calculating the 5-year threshold, service of more than 240 days in the fourth year is treated as a full year (the Supreme Court has ruled that 4 years and 190 days of service qualifies). Service exceeding 6 months in the final year is rounded up to a full year.
Understanding the 15/26 Formula
The formula for employees covered under the Act is: Gratuity = Last Drawn Salary x 15 x Years of Service / 26. The divisor of 26 (instead of 30) represents the number of working days in a month, which makes the formula more favorable to employees. "Last Drawn Salary" means basic wages plus dearness allowance last drawn. For piece-rated employees, it is the average of the last 3 months' wages. For employees not covered under the Act, the divisor is 30.
Forfeiture Conditions
Gratuity can be forfeited, wholly or partially, only in two specific situations: (1) if the employee's services are terminated for any act of willful omission or negligence causing damage to employer property, the gratuity can be forfeited to the extent of the damage; (2) if the employee is terminated for riotous or disorderly conduct, or any act of violence, or for committing an offence involving moral turpitude during employment, the gratuity can be wholly forfeited. The forfeiture must be documented and communicated in writing.
Gratuity and the New Labor Codes
The Code on Social Security, 2020 (yet to be notified) proposes to reduce the eligibility period from 5 years to 1 year for fixed-term employees. It also proposes to extend gratuity coverage to gig and platform workers. Employers should prepare for these changes by maintaining accurate service records for all categories of workers and provisioning for potentially higher gratuity liabilities.
Gratuity Compliance Process
Track Eligibility & Nominations
Maintain records of each employee's date of joining and continuous service. Collect Form F nominations within 30 days of completing 1 year. Update nominations on life events (marriage, childbirth).
Kiework automatically tracks tenure milestones, sends nomination reminders, and stores Form F digitally with employee profiles.
Calculate Gratuity on Separation
When an employee exits, compute gratuity using the 15/26 formula on last drawn Basic + DA. Round service years (>6 months = 1 year). Cap at ₹25 lakh for employees covered under the Act.
One-click gratuity calculation during offboarding. Auto-applies the correct formula, ceiling, and year-rounding rules.
Process Forfeiture (if applicable)
Gratuity can be partially or wholly forfeited if the employee is terminated for moral turpitude, riotous/violent behavior, or causing damage to employer property. Document the grounds thoroughly.
Kiework flags forfeiture conditions during exit processing and requires documented justification with approval workflow.
Disburse & Report
Pay gratuity within 30 days of it becoming due. Compute TDS on gratuity exceeding the ₹25 lakh exemption. Issue Form 16 reflecting gratuity payment and any tax deducted.
Automated gratuity disbursement with FnF settlement. TDS auto-computed on taxable portion. Payment records integrated with Form 16.
Gratuity FAQ
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Automate Gratuity Compliance
Stop managing Payment of Gratuity Act, 1972 manually. Kiework automates calculations, filing deadlines, and compliance validation — so you never miss a deadline.