This post has already been read 172 times!
Gratuity Rules for Less Than 5 Years of Service in India
Gratuity is an important financial benefit that recognizes and rewards an employee’s continuous service. But many employees remain confused about whether they can receive gratuity if they leave a job before completing 5 years. At cmaknowledge.in, we aim to provide clear and practical explanations of such employee rights in India. This in-depth article covers the complete picture — laws, exceptions, calculations, legal judgments, real-life cases, and step-by-step claim procedures — all in simple language.
Gratuity Calculator
Calculate your gratuity amount as per the Payment of Gratuity Act, 1972. Know your rightful benefits after years of service.
Enter Your Details
Your Gratuity Estimate
Important Information
This calculator provides an estimate of gratuity based on the Payment of Gratuity Act, 1972. The actual amount may vary depending on specific employment terms and conditions.
Key points to remember:
- Gratuity is payable after 5 years of continuous service (except in case of death or disablement)
- For employees covered under the Act: Gratuity = (Last drawn salary × 15/26) × Completed years of service
- Service period exceeding 6 months is rounded up to the next year
- The maximum gratuity amount payable under the Act is ₹20 lakh
- Gratuity received by government employees is fully exempt from tax
- For private sector employees, the least of the following is exempt: Actual gratuity, ₹20 lakh, or 15 days salary for each year of service
Eligibility
Minimum 5 years of continuous service with the same employer
Calculation
(Last salary × 15/26) × Completed years of service
Tax Exemption
Up to ₹20 lakh is exempt from income tax
What is Gratuity?
Gratuity is a one-time financial benefit given by an employer to an employee as a gesture of appreciation for the services rendered. It is governed by the Payment of Gratuity Act, 1972. Employers must pay gratuity to employees who leave the organization after fulfilling certain service criteria, especially in cases of resignation, retirement, death, or permanent disability.
The 5-Year Rule: What the Law Says
Under Section 4(1) of the Payment of Gratuity Act, gratuity becomes payable when an employee has rendered continuous service of not less than five years. But this rule is not absolute.
The 4 Years and 240 Days Rule
In many court rulings, including judgments by the Madras and Bombay High Courts, it has been clarified that an employee who has completed 4 years and 240 working days in the fifth year will be deemed to have completed 5 years for the purpose of gratuity.
This concept is not written in the Act but derived from judicial interpretation and the definition of “continuous service” under the law. For organizations working 5 days a week, this threshold may reduce to 190 working days in a year.
Eligibility Conditions Explained Practically
| Service Duration | Eligibility | Notes |
|---|---|---|
| Less than 1 year | Not eligible | Unless due to death/disability |
| 1 to 4 years | Not eligible | Except in case of death/disability |
| 4 years + 240 days | Eligible | Based on judicial rulings |
| 5 years and above | Eligible | Under standard provisions |
How is Gratuity Calculated?
The formula is standardized:
Example Calculation
Suppose your last drawn Basic + DA is ₹30,000/month, and you’ve completed 4 years and 240 days (considered 5 years).
Gratuity = (30,000 × 15 × 5) / 26 = ₹86,538
Gratuity for Death or Disability Before 5 Years
If an employee dies or is permanently disabled due to an accident or illness during employment, gratuity is payable regardless of the duration of service. The nominee or legal heir can claim it.
The gratuity amount will be calculated based on actual years of service completed, using the same formula.
Process of Claiming Gratuity
- Submit Form I to your employer within 30 days of leaving the job.
- The employer will issue Form L confirming the gratuity amount.
- The amount should be paid within 30 days.
If not paid within time, the employer is liable to pay interest on the delayed amount under Section 7(3A) of the Act.
What If Employer Refuses or Delays Gratuity?
If your employer fails to pay gratuity or wrongfully denies it, you can approach the controlling authority under the Act using Form N.
You can file a complaint with the Labour Commissioner of your jurisdiction. The employer may be penalized and even prosecuted under the Act.
Supporting Judgements and Case Law
- Madras High Court: Recognized 4 years and 240 days as valid for gratuity eligibility (Mettur Beardsell Ltd. case).
- Bombay High Court: Held that death of an employee doesn’t require 5 years of service for gratuity to be paid to legal heirs.
Real-Life Scenarios
- Rita worked for 4 years 9 months: Eligible for gratuity under 4y+240d rule.
- Raj passed away after 2 years of service: His family is eligible for gratuity.
- Meena resigned after 4 years 5 months: May not qualify unless 240 days completed in 5th year.
Tax on Gratuity
Gratuity is tax-exempt up to ₹20 lakhs in a lifetime for private-sector employees covered under the Act. Any amount received above this is taxable under the Income Tax Act, Section 10(10).
Tips to Ensure Gratuity Claim Success
- Maintain records: Appointment letter, payslips, resignation letter.
- Calculate your working days in the 5th year accurately.
- Use official formats (Form I, L, N) while applying or filing complaints.
- Consult a labor lawyer if your employer denies gratuity unlawfully.
Frequently Asked Questions (FAQs)
1. Can I get gratuity if I worked for 4 years and 8 months?
Yes, if you’ve completed 240 days in the fifth year, you are eligible.
2. What if my company is not covered under the Gratuity Act?
Even if the Act doesn’t apply, some companies voluntarily pay gratuity. Check your employment contract.
3. How soon should the employer pay gratuity?
Within 30 days of receiving the application (Form I).
4. Can gratuity be denied?
Only if the employee is dismissed for reasons involving moral turpitude, as per law.
Conclusion
While the general belief is that gratuity is only payable after 5 years, real legal interpretations say otherwise. Employees who’ve completed 4 years and 240 days — or those whose families suffer loss due to death or disability — are also protected under the law.
Stay informed, claim what you deserve, and encourage others to be aware of their workplace rights. For more helpful guides on employment laws, taxes, and finance, keep visiting cmaknowledge.in.
