What Is Gratuity in India and When Do You Have to Pay It?
Gratuity in India is a statutory lump-sum payment an employer owes an employee on exit, but only after the employee has completed five years of continuous service. It's governed by the Payment of Gratuity Act, 1972, and calculated as roughly 15 days of wages for each completed year of service (using last-drawn basic + dearness allowance). For foreign employers, the practical takeaway is simple: most early-stage India hires move on before the five-year mark, so gratuity often never triggers — but when it does, you need to be ready for it and not surprised. This post explains who's eligible, how it's calculated, and how we handle it at SynkPay so there's no nasty surprise bill.
Gratuity is one of those India statutory items first-time foreign employers haven't heard of — until an employee crosses five years and the obligation appears.
Who is eligible for gratuity?
Under the Payment of Gratuity Act, 1972, an employee qualifies for gratuity when they:
Complete five years of continuous service with the same employer, AND
Leave through resignation, retirement, or termination (not for proven misconduct in certain cases).
The five-year rule has narrow exceptions — gratuity is also payable on death or disablement, with the five-year condition waived in those cases. But for the standard case, five years of continuous service is the trigger.
How gratuity is calculated
The standard formula is:
Gratuity = (Last drawn monthly salary × 15 × years of service) ÷ 26
Where "salary" means basic pay plus dearness allowance, "15" is 15 days of wages per year, and "26" is the assumed number of working days in a month. As an accrual rate, this works out to roughly 4.81% of basic pay per year — which is the figure to use if you want to provision for it monthly.
Worked example: an employee with a last-drawn basic of INR 60,000/month who leaves after 6 years would receive approximately (60,000 × 15 × 6) ÷ 26 ≈ INR 207,700. There's a statutory cap on the tax-exempt amount, but the calculation above is the core obligation.
Two ways employers handle gratuity
There are two legitimate approaches:
Monthly accrual — provision ~4.81% of basic every month so the money is set aside before the obligation crystallises. Common for established companies with long-tenure staff.
Crystallise-and-collect — calculate and pay the gratuity when the employee actually reaches eligibility, rather than accruing monthly.
Neither is "wrong" — it's a cashflow choice. For early-stage teams where most engineers move on inside five years, monthly accrual can tie up cash against an obligation that may never trigger.
How SynkPay handles gratuity
As your Employer of Record in India, we track each employee's tenure from day one, so eligibility is never a surprise. We use a crystallise-and-collect approach: we notify you as an employee approaches the five-year mark, calculate the exact gratuity due, and collect it from you at that point — rather than charging you a monthly accrual against an obligation most early-stage hires never reach. You're never hit with an unexpected bill, and you don't tie up working capital prematurely. Gratuity sits within the standard EOR relationship — there's no separate gratuity-handling fee on top of our flat $349/month. For the full statutory picture alongside PF, ESI and TDS, see compliant hiring in India: PF, ESI, gratuity & TDS, and model total employer cost with our India employee cost calculator.
FAQ
When does an employer have to pay gratuity in India?
Gratuity becomes payable after an employee completes five years of continuous service, on resignation, retirement or termination (with exceptions for death or disablement, where the five-year condition is waived). Before five years, no gratuity is owed in the standard case. It's governed by the Payment of Gratuity Act, 1972, and is a statutory obligation for covered establishments.
How is gratuity calculated in India?
The standard formula is (last drawn monthly salary × 15 × years of service) ÷ 26, where salary means basic plus dearness allowance. That equates to about 15 days of wages per completed year, or an accrual rate of roughly 4.81% of basic pay per year. For example, an employee on INR 60,000 basic leaving after six years receives approximately INR 207,700.
Do foreign companies have to pay gratuity to India employees?
Yes, if the employee completes five years of continuous service and the establishment is covered by the Payment of Gratuity Act — the obligation applies regardless of whether the employer is foreign or domestic. If you employ through an EOR, the EOR manages the gratuity calculation and payment as part of compliant employment. Most early-stage hires leave before five years, so it often doesn't trigger, but you should be prepared for when it does.
Should I accrue gratuity monthly or pay it when it's due?
Both are legitimate. Monthly accrual (~4.81% of basic) sets money aside steadily and suits companies with long-tenure staff. Crystallise-and-collect — calculating and paying gratuity only when an employee reaches five years — avoids tying up cash against an obligation that many early-stage hires never reach. SynkPay uses crystallise-and-collect and notifies you ahead of the five-year mark so there's no surprise.
Is gratuity included in the EOR fee?
At SynkPay, there's no separate charge for handling gratuity — tracking tenure and managing the calculation and collection sit within the standard EOR relationship and the flat $349/employee/month fee. The gratuity amount itself is the employer's statutory cost, funded by you when it becomes due, but the administration of it isn't an extra line item.