PF vs Gratuity: Key Differences, Eligibility, Calculation and Tax Treatment

In summary

PF and gratuity are both employment benefits, but they work differently. The Employees’ Provident Fund (EPF) is a retirement savings scheme funded through contributions from the employee and employer, with interest added to the accumulated balance. Gratuity is a lump-sum benefit funded by the employer and generally becomes payable after five years of continuous service, subject to specified exceptions.

The key differences include:

• Contribution: Both the employee and employer contribute to EPF. The employer pays the gratuity amount.
• Purpose: PF builds a retirement corpus, while gratuity recognises qualifying service with an employer.
• Withdrawal: PF withdrawals are subject to EPFO rules. Gratuity is generally paid when employment ends under qualifying circumstances.
• Calculation: PF depends on contributions and interest. Gratuity is calculated using the employee’s last-drawn wages and qualifying service.

Gratuity is a lump-sum employment benefit paid by an employer to an eligible employee when their employment ends under specified circumstances. It recognises the employee’s service with the organisation.

Gratuity is governed by the Code on Social Security, 2020, which came into effect on 21 November 2025. The Code provides for gratuity on events such as superannuation, retirement, resignation, death, disablement and the expiry of a fixed-term employment contract, subject to the applicable conditions.

Key features of gratuity

• Employer-funded benefit: The employer is responsible for paying the gratuity amount. Employees do not make a separate monthly contribution towards it.
• Service requirement: Gratuity is generally payable after at least five years of continuous service.
• Specified exceptions: The five-year service requirement does not apply in cases such as death or disablement. Fixed-term employees are also covered under the applicable provisions.
• Lump-sum payment: The eligible amount is paid as a one-time benefit when it becomes payable.
• Calculation: The amount is based on the employee’s last-drawn wages and qualifying years of service.
• Nomination: Employees can nominate a person to receive gratuity in accordance with the applicable rules.

Who is eligible for gratuity?

An employee is generally eligible for gratuity after completing at least five years of continuous service with an employer, when employment ends because of:

• Superannuation.
• Retirement or resignation.
• Death or disablement due to an accident or disease.
• Expiry of a fixed-term employment contract.

The five-year requirement is not necessary in cases of death or disablement. Under the applicable provisions, fixed-term employees qualify for gratuity after completing one year of service under the contract.

The eligibility conditions and calculation may differ for specific categories of employees. Employees should check the provisions applicable to their employment arrangement.

The PF balance grows through contributions made by the employee and employer, along with interest credited to the account.

For a standard contribution arrangement, the employee generally contributes 12% of applicable PF wages. The employer also contributes 12%, subject to the relevant rules. Where EPS membership applies, a prescribed portion of the employer’s contribution goes towards the pension scheme.

For example, if an employee’s applicable PF wages are Rs.25,000 per month:

• Employee’s contribution at 12%: Rs.3,000.
• Employer’s total contribution at 12%: Rs.3,000.
• The employer’s contribution is divided between EPF and EPS, where EPS membership applies.

The actual amount credited to the employee’s EPF account depends on the applicable contribution rules and the employee’s membership status. Interest is added separately at the notified rate.

Employers are responsible for meeting the applicable compliance requirements for both benefits:

Employer’s responsibilities for PF

An employer covered by the EPF framework is generally required to:

• Register the establishment with the EPFO, where applicable.
• Identify eligible employees and complete their PF enrolment.
• Calculate employee and employer contributions using the applicable wage base.
• Deposit contributions within the prescribed timelines.
• File the required electronic returns and maintain contribution records.
• Support employees with PF transfers and withdrawal-related documentation.

Employer’s responsibilities for gratuity

An employer is generally required to:

• Determine whether an employee qualifies for gratuity.
• Calculate the payable amount using the applicable wage definition and service period.
• Pay gratuity within the prescribed period after it becomes payable.
• Maintain the necessary employee and payment records.
• Follow the applicable nomination and claim procedures.

PF and gratuity serve different purposes, so one cannot be considered a replacement for the other.

PF helps employees build a retirement corpus through regular contributions and interest. It is also portable when an employee changes jobs, subject to the applicable transfer process.

Gratuity provides a lump-sum benefit when an employee meets the qualifying service and exit conditions. It can help meet financial requirements after retirement or when employment ends.

Both benefits contribute to an employee’s financial security. Understanding their eligibility requirements, calculation methods and tax treatment can help employees plan their savings and retirement needs more effectively.