Do You Get Gratuity Before 5 Years? The 4 Years 240 Days Rule (2026)
Verified July 2026 · General information, not legal advice — confirm your eligibility with your employer or a professional.
Gratuity Calculator
- Need 5 years — but 4 years + 240 days counts as the 5th year.
- Formula: (last basic + DA) × 15 × years ÷ 26.
- Salary here means basic + DA only (not HRA/allowances).
- Tax-free up to ₹20 lakh (lifetime, across employers).
- Death/disability → gratuity payable at any tenure.
Do you actually need a full 5 years?
The rule of thumb is 5 years of continuous service, but it isn't always a hard five. Courts (and the Payment of Gratuity Act's definition of "continuous service") have long held that completing 4 years and 240 working days in the fifth year is treated as a completed fifth year — 190 days for establishments on a 5-day week. So an employee who leaves at, say, 4 years and 8 months can often still be eligible. There's one clear exception where no minimum applies at all: gratuity is payable regardless of tenure if service ends due to death or permanent disability.
How gratuity is calculated
For employees covered by the Payment of Gratuity Act, the formula is:
Gratuity = (Last drawn Basic + DA) × 15 × Years of service ÷ 26
The 15 is 15 days' wages per year of service, and 26 is the assumed working days in a month. "Salary" is strictly basic pay plus dearness allowance — HRA, bonuses and other allowances don't count. A part-year of more than 6 months rounds up to a full year (so 6 years 7 months counts as 7).
Worked example
Last basic + DA of ₹40,000 and 6 years of service: 40,000 × 15 × 6 ÷ 26 = ₹1,38,462. The calculator above does this for your numbers.
Tax on gratuity
Gratuity is tax-free up to a lifetime ceiling of ₹20 lakh across all your employers; anything above ₹20 lakh is taxed at your slab. Government employees get gratuity fully exempt. For most private-sector employees the whole amount falls well within ₹20 lakh and is tax-free.
| Employee | Tax treatment |
|---|---|
| Government | Fully exempt |
| Covered by the Act | Least of: actual gratuity, the formula amount, or ₹20 lakh — exempt |
| Above ₹20 lakh (lifetime) | Excess taxed at slab |
A note on the new labour codes
Under the newer Code on Social Security, 2020, gratuity rules are being updated — for example fixed-term employees becoming eligible after just 1 year, and "wages" being defined so that basic pay is at least 50% of CTC (which can raise gratuity). Rollout has been phased, so confirm the current position with your employer or HR before relying on it.
Covered by the Act, or not? The formula changes
The Payment of Gratuity Act applies to establishments with 10 or more employees. Whether your employer is covered changes both the formula and the rounding:
| Covered by the Act | Not covered | |
|---|---|---|
| Formula | (Basic + DA) × 15 × years ÷ 26 | (Avg last-10-months salary) × 15 × years ÷ 30 |
| Part-year | > 6 months rounds up to a full year | Only completed years count |
| Salary means | Basic + DA | Basic + DA (+ commission if a fixed % of turnover) |
So the same tenure can produce a slightly different figure depending on coverage. Most organised private employers are covered; if you're not sure, ask HR whether your gratuity is paid "under the Act."
How to actually claim your gratuity
Gratuity isn't always paid automatically — knowing the process protects you:
- Gratuity becomes payable when you leave after eligible service (resignation, retirement, termination, or on death/disability).
- You (or your nominee) apply to the employer in Form I, generally within 30 days of it becoming payable.
- The employer must calculate and pay within 30 days of the gratuity becoming payable.
- If the employer delays beyond 30 days, they are liable to pay simple interest on the amount for the delay period.
- If the employer refuses or underpays, you can approach the Controlling Authority (the Assistant Labour Commissioner) under the Act.
Keep copies of your appointment letter, salary slips (showing basic + DA) and your resignation/relieving letter — these establish both your tenure and your salary for the calculation.
Nomination — do this while you're employed
File a nomination in Form F with your employer, naming who should receive your gratuity if you die in service. Without a valid nomination, a death gratuity claim can get tangled in heirship proof. On death or permanent disability, gratuity is payable regardless of how many years were completed, and it goes to the nominee or legal heirs.
When gratuity can be reduced or forfeited
Gratuity is a right, but not an unconditional one. Under the Act it can be partly or wholly forfeited in limited situations — for example, if your services were terminated for wilful damage or loss to the employer's property (forfeiture to the extent of the loss), or for riotous/violent conduct or an act involving moral turpitude committed during employment. Ordinary resignation or a routine exit does not cost you your gratuity.
A second worked example
Take a longer career: last drawn basic + DA of ₹60,000 and 18 years 7 months of covered service. The 7 months round up, so years = 19. Gratuity = 60,000 × 15 × 19 ÷ 26 = ₹6,57,692 — comfortably within the ₹20 lakh tax-free ceiling, so the whole amount is tax-free. Only very high salaries and very long tenures approach the ₹20 lakh cap.
Common mistakes
- Assuming you get nothing just short of 5 years — the 4-years-240-days rule may still make you eligible.
- Calculating on gross salary instead of basic + DA.
- Forgetting the ₹20 lakh limit is lifetime, not per employer.
- Not filing a Form F nomination, which complicates a death claim.
- Letting an employer delay past 30 days without claiming the interest you're owed.
Gratuity vs your other exit dues — don't confuse them
When you leave a job, several payments can arrive together, and people often lump them into one "settlement" figure. They're distinct, with different rules and tax treatment:
| Payment | What it rewards | Tax |
|---|---|---|
| Gratuity | Long service (usually 5+ years) | Tax-free up to ₹20 lakh |
| Leave encashment | Unused earned leave | Exempt up to a limit (higher for retirement) |
| Notice-pay / severance | Contractual exit terms | Generally taxable as salary |
| EPF | Retirement savings | Tax-free after 5 years |
Knowing which is which helps you check your full-and-final settlement properly — and claim the right tax exemption on each. Gratuity is the one people most often forget to verify, precisely because it only appears when you cross the eligibility line.
Quick reference — gratuity by salary and tenure
Using the covered formula (Basic + DA) × 15 × years ÷ 26, here's roughly what different profiles receive:
| Last Basic + DA | 5 years | 10 years | 20 years |
|---|---|---|---|
| ₹25,000 | ₹72,115 | ₹1,44,231 | ₹2,88,462 |
| ₹40,000 | ₹1,15,385 | ₹2,30,769 | ₹4,61,538 |
| ₹60,000 | ₹1,73,077 | ₹3,46,154 | ₹6,92,308 |
Notice how even at 20 years these stay well within the ₹20 lakh tax-free ceiling — the cap only bites for very senior, long-tenured employees. Use the calculator above for your exact figure.
Gratuity in your full-and-final settlement
When you resign, gratuity is paid as part of your full-and-final (F&F) settlement, along with any unpaid salary, leave encashment and notice-period adjustments. Don't assume it's automatically included — check your F&F statement line by line, confirm the basic + DA and years used are correct, and raise it immediately if gratuity is missing or wrongly calculated. Employers must pay within 30 days, so a delayed F&F that withholds gratuity is something you can formally pursue.
Two situations people get wrong
"I resigned at 4 years 9 months — do I lose everything?" Often no. On a 6-day-week establishment, 4 years plus 240 days in the fifth year is treated as complete, so you may well be eligible. Check your actual working-days count.
"My CTC shows a gratuity component — is that extra?" Not really. Many employers show gratuity as part of CTC, but it's only paid out when you become eligible (usually 5 years). If you leave before eligibility, that CTC line typically doesn't come to you — which is another reason the 5-year mark matters.
Related guides
Leaving a job? Also read is EPF withdrawal taxable before 5 years and reconciling Form 16, 26AS and AIS. For take-home planning, try the FD calculator.
Frequently asked questions
Do you get gratuity before 5 years?
Usually you need 5 years, but 4 years + 240 days counts as the 5th year; death/disability has no minimum.
How is it calculated?
(Last basic + DA) × 15 × years ÷ 26.
Is it tax-free?
Yes, up to ₹20 lakh lifetime; excess is taxed at slab.
What is 4 years 240 days?
4 completed years + 240 working days (190 on a 5-day week) in the 5th year, treated as a full 5 years.
Is gratuity part of my CTC?
Employers often show it in CTC, but it's only paid when you become eligible (usually 5 years). Leave earlier and that component generally isn't paid to you.
What if my employer refuses to pay gratuity?
Apply in Form I first. If they still refuse or underpay, approach the Controlling Authority (Assistant Labour Commissioner) under the Payment of Gratuity Act.
Is leave encashment the same as gratuity?
No — they're separate. Leave encashment pays for your unused leave; gratuity rewards long service. Both may appear in your full-and-final settlement.
How soon must gratuity be paid?
Within 30 days of it becoming payable. Beyond that, the employer owes simple interest for the delay.
About the author. Written by Dinesh Kumar S, Chennai — B.Sc. Mathematics, M.Sc. IT — who runs Finance Guided and ComplyKraft to explain Indian money rules in plain language.
Disclaimer: General information, verified July 2026. Gratuity eligibility, formula and limits depend on your establishment and the law in force — confirm with your employer or a professional before relying on this.
Dinesh Kumar S
Founder & AuthorDinesh is an accounts & GST compliance professional with 5+ years inside the Indian tax-compliance machinery at a Chennai-based IT services company. He writes a regulation-reader's column on Indian personal finance — every claim anchored to the actual Act, regulation, or circular it comes from. No product sales, no commissions, no paid placements.