Statutory and compliance
Gratuity: the exit payment long service earns
Gratuity is a lump sum an employer pays an employee for long unbroken service, under the Payment of Gratuity Act, 1972. It falls due when the person leaves after completing the qualifying period of continuous service, by resignation, retirement, death or disablement. The amount is worked out on the last drawn wages, and the employer carries the whole cost with nothing taken from the employee.
Last reviewed: September 2026
Also called: gratuity, gratuity payment, end of service payment
In plain English
When someone has worked for the same business for many years and then leaves, the business owes them a one-time payment on top of whatever salary is still due.
How it works in detail
Eligibility turns on continuous service, and that phrase does more work than most owners expect. Service runs from the joining date to the last working day, and approved leave, a lay-off or an authorised absence usually does not break the run. Whether a year with heavy absence still counts as a full year, and what the qualifying period is for your establishment, come from the Act and the rules under it, so ask your consultant.
The amount rests on the last drawn wages, ordinarily basic pay with dearness allowance, and on the length of service. Nothing is deducted from the monthly salary through those years and no gratuity line appears on a monthly slip. It surfaces once, inside the full and final settlement, which is where arguments about the real joining date usually come to light.
A worked example
The setup
Say Manohar resigns from a trading firm after many years on the rolls. His last drawn basic is INR 18,900 and his dearness allowance for that month is INR 3,600.
The calculation
INR 18,900 + INR 3,600 = INR 22,500 is the wage figure the gratuity is worked out on. His consultant applies the formula in the Act to that and his years of service, and returns INR 1,43,500, an illustrative amount and not a rate quoted here.The result
Manohar is paid INR 1,43,500 as a separate line in his settlement, apart from his last month's salary. None of his earlier slips carried a gratuity entry.
Common mistakes
- Counting service from the date a worker was made permanent instead of the date they actually started. If the person was on the rolls earlier under another label, that earlier stretch usually counts too.
- Working the amount out on gross salary. The base is the last drawn wages as the Act defines them, ordinarily basic pay with dearness allowance, so other allowances stay out of the sum.
- Treating gratuity as something to recover from the employee. The employer carries the full cost, and taking anything off a monthly salary towards it is wrong.
How VTClock handles it
VTClock does not compute, fund, deduct or pay gratuity and produces no gratuity statement. It holds the attendance and salary record your consultant works the amount out from.
Frequently asked questions
Is gratuity taken out of the employee's monthly salary?
No. The employer carries the whole cost of gratuity, and no part of it is deducted from wages during the years of service. An employee who sees a deduction described as gratuity on a monthly slip should ask what it actually is, because the payment under the Act reaches them at exit and never through a monthly cut.
Does a long unpaid absence break an employee's continuous service?
Usually not by itself. Service is treated as continuous across approved leave, sickness, a lay-off and other authorised absence, and the Act sets out how a year with many absent days is counted. Where a worker was off for a long stretch, note the dates and the reason on the record and have your consultant decide how that year counts before you settle the amount.
Does someone who resigns get gratuity, or only a person who retires?
Resignation is covered in the same way as retirement, once the qualifying period of continuous service is complete. Death and disablement are treated differently, and the qualifying period does not apply in those cases. The reason for leaving matters far less than the length of service, so the joining date on your records is the fact worth getting right.
Does a small shop with a handful of staff owe gratuity at all?
Coverage depends on the kind of establishment and the number of people it employs, and an establishment once covered generally stays covered even if the headcount later falls. The threshold is set by the Act and is the sort of figure worth confirming with your consultant instead of assuming. Some employers also pay gratuity by contract even where the Act does not reach them.
Related terms
- Full and final settlementA full and final settlement is the closing payment made when an employee leaves, covering everything still owed in both directions.
- Basic salaryBasic salary is the fixed core component of a monthly pay structure, before house rent allowance, dearness allowance and any other allowance is added on top.
- Dearness allowanceDearness allowance, written DA on a salary slip, is a pay component that moves with the cost of living.
- Net salaryNet salary is what is left of a month's earnings after every deduction the employer is required or authorised to make has come off.
- EPFEPF, the Employees' Provident Fund, is a retirement savings account run for employees under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
- Earned leaveEarned leave is paid leave an employee builds up by working, credited in proportion to days actually worked rather than granted upfront at the start of the year.
Modules that touch this
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