Gratuity, and the five-year rule that is not quite five years
A lump sum for long service, computed from last drawn basic plus DA — where both the eligibility threshold and the tax exemption have edges worth knowing before you pay.
What it is
A lump sum on exit after five years of continuous service. Last drawn basic + DA × 15/26 × completed years.
The exceptions
Death and disablement are exempt from the five-year requirement.
The trap
Reading "five years" literally. Four years and seven months has repeatedly been held to qualify.
Gratuity is a lump sum payable to employees who complete five years of continuous service, calculated as last drawn basic plus dearness allowance × 15/26 × completed years. It is payable on resignation, retirement, death or disablement, with death and disablement exempt from the five-year rule.
How it works in practice
On ₹25,000 basic after 6 years: 25,000 × 15 ÷ 26 × 6 ≈ ₹86,538.
What to watch for
Four years and seven months counts as five in many judicial readings, and the tax exemption is capped — check both before paying.
How Klok handles it
Klok computes gratuity at full-and-final from the actual joining date and last drawn salary, not from a manual sheet.
Gratuity FAQs
Is gratuity payable if the employee resigns?
Yes, provided the five-year continuous service condition is met. It is not restricted to retirement, and it is not forfeitable simply because the employee chose to leave.
Is gratuity tax free?
It is exempt up to a prescribed ceiling, computed under a formula that differs for employees covered and not covered by the Payment of Gratuity Act. Above the ceiling it is taxable, so the exemption should be computed rather than assumed.
Which salary is used in the formula?
Last drawn basic plus dearness allowance — not gross, and not CTC. Using gross overstates the liability considerably.
Do we have to fund gratuity in advance?
You are not obliged to hold a fund, but you are obliged to pay when it falls due. Employers who carry no provision discover the liability in the month a long-serving employee leaves, which is the worst month to discover it.
Does gratuity apply to fixed-term employees?
The five-year condition has been relaxed for fixed-term employment under the newer wage and social security framework. Treating fixed-term staff as automatically ineligible is a position worth checking before you rely on it in a settlement.
Can gratuity be forfeited?
Only on narrow statutory grounds tied to the reason for termination, and even then usually only to the extent of damage caused. Forfeiting as a general disciplinary measure, or to offset an unrelated recovery, does not hold up.
Is gratuity part of CTC?
Many employers show it there, which is legitimate as a cost view but confuses employees who read CTC as take-home entitlement. If you include it, label it as an employer provision rather than something the employee can draw.
Stop calculating this by hand
Klok computes it from your own attendance and salary data, every month, with the working shown.