Payment of Gratuity Act, 1972: Eligibility, Calculation, and Tax Rules

• Applies to: establishments with 10 or more employees on any day in the preceding 12 months
• Eligibility: 5 years of continuous service (waived for death or disablement)
• Formula: (Last drawn salary ÷ 26) x 15 x years of service
• Tax exemption: up to Rs. 20 lakh under Section 10(10) of the Income Tax Act
• Payable on: superannuation, retirement, resignation, death, or disablement
• A documented gratuity history strengthens your overall financial profile, alongside other income proof, when applying for a Bajaj Finance Home Loan.

The Payment of Gratuity Act, 1972 is an Indian law requiring employers to pay a lump-sum gratuity to employees who complete a minimum period of continuous service, as a form of recognition for long-term service to the organisation.

Gratuity is distinct from your regular salary and provident fund contributions — it is a separate, one-time benefit paid specifically for the length and continuity of your service with a single employer.

The Act was originally passed as central legislation applicable across India, and remains the operative law for gratuity today even though the Code on Social Security, 2020 has been enacted to eventually consolidate it with several other labour laws — since the Code's provisions on gratuity have not yet been separately notified into force in a way that displaces the 1972 Act's operation, employers and employees continue to apply the Payment of Gratuity Act, 1972 directly.

Eligibility under the Act depends on both the size of the establishment and the individual employee's length of service.

Once an establishment crosses the 10-employee threshold, it remains covered under the Act even if the employee count later falls below 10 — the obligation doesn't reverse itself simply because headcount later drops.

This "sticky" coverage rule matters for smaller, growing companies specifically: a business that briefly touches 10 employees, even for a single day within a 12-month window, becomes permanently covered going forward, regardless of whether headcount later shrinks back down. Employees at such companies should not assume gratuity doesn't apply to them simply because current staff numbers look smaller than the threshold.

The Act sets out a specific formula for employees covered under it, based on last-drawn wages and completed years of service.

Gratuity = (Last drawn monthly salary ÷ 26) x 15 x Number of years of service

This formula applies specifically to employees covered under the Act; employers can, at their discretion, pay a higher amount to employees not covered under it, though they are not obligated to do so. The divisor of 26 is a common point of confusion for employees calculating their own entitlement manually, since it reflects working days rather than a calendar month's full day count.

Gratuity is taxable as salary income under the Income Tax Act, 1961, but a significant portion is exempt under Section 10(10), with the exact exemption depending on your employment category.

The Rs. 20 lakh ceiling applies cumulatively across your entire working life, not per employer — if you've already claimed exemption on gratuity from a previous employer, that amount counts against the same lifetime ceiling when you receive gratuity again from a later employer. Keeping a record of any prior gratuity exemption claimed is therefore worth doing, since your current employer's HR or payroll team will not automatically know your history with a previous organisation.

Consider Meera, a 41-year-old operations manager in Chennai with a last-drawn basic salary plus DA of Rs. 72,000 a month and a CIBIL score of 743, resigning after 8 years and 7 months of continuous service with her employer, a company with 45 employees.

Since Rs. 3,73,846 is well under the Rs. 20 lakh exemption ceiling, and Meera has not previously claimed gratuity exemption from an earlier employer, the full amount is tax-exempt. She receives it as a lump sum alongside her final settlement, within 30 days of her last working day in most cases. Meera also keeps a copy of her gratuity calculation and payment confirmation for her own financial records, since this documentation is useful both for her tax filing and as a reference if she ever needs to verify her exemption history against the lifetime ceiling in future.

A documented gratuity payout can be used toward your down payment or to reduce your loan amount, and a consistent employment history with a documented gratuity entitlement can also support your overall financial profile during a lender's assessment. Providing your gratuity settlement letter alongside your other income documents gives a lender a fuller picture of your available funds beyond your regular monthly income. Check your home loan eligibility when you're ready to apply.