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 (permanent employees) or one year of service (fixed-term employees). Since 21 November 2025 it's governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. It's calculated as 15 days' wages for each completed year of service at the last drawn wage, capped at ₹20 lakh, and must be paid within 30 days of falling due. For foreign employers, the practical takeaway is simple: most early-stage permanent 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 becomes eligible and leaves, and the obligation appears.
Who is eligible for gratuity?
Under the Code on Social Security, 2020, an employee qualifies for gratuity when they:
Complete five years of continuous service with the same employer (permanent employees), or one year of service under the contract, counted from the contract start (fixed-term employees, paid pro rata), AND
Leave through resignation, retirement, superannuation 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. The fixed-term rule is the big change under the Code: a direct hire on a written fixed-term contract becomes eligible after one year, not five. For the standard permanent hire, five years of continuous service is still the trigger.
How gratuity is calculated
The standard formula is:
Gratuity = (Last drawn monthly salary × 15 × years of service) ÷ 26
Where "salary" means wages as defined by the Code, "15" is 15 days of wages per completed year (a part-year over six months counts as a full year), and "26" is the assumed number of working days in a month. Under the Codes, "wages" means basic pay plus dearness allowance. If allowances make up more than half of total pay, the excess is added back, so gratuity is calculated on at least half of total remuneration — the Ministry of Labour's FAQs work through an example. As an accrual rate, this works out to about 4.81% of wages as defined by the Code for each month of service — which is the figure to use if you want to provision for it in your own accounts.
Worked example: an employee with last drawn wages (as defined by the Code) of INR 60,000/month who leaves after 6 years would receive approximately (60,000 × 15 × 6) ÷ 26 ≈ INR 207,700. Gratuity is capped at ₹20 lakh, and must be paid within 30 days of becoming payable; after that, interest is due.
Two ways employers handle gratuity
There are two legitimate approaches:
Monthly accrual — provision ~4.81% of wages every month so the money is set aside before the obligation falls due. Common for established companies with long-tenure staff.
Pay when due — calculate and pay the gratuity when an eligible employee actually leaves, rather than accruing monthly.
Neither is "wrong" — it's a cashflow choice. For early-stage teams where most permanent 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. SynkPay doesn't pre-collect gratuity each month. When an employee becomes eligible and leaves, the gratuity is calculated under the Code on Social Security and invoiced to you at that point — rather than charging you a monthly accrual against an obligation most early-stage hires never reach. We flag it to you as an employee approaches eligibility (five years for permanent employees, one year for fixed-term), and pay the employee within the 30-day statutory window. 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 when an eligible employee leaves: after five years of continuous service for permanent employees, or after one year of service for fixed-term employees, on resignation, retirement or termination (with exceptions for death or disablement, where the five-year condition is waived). Before that, no gratuity is owed in the standard case. It's governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972, and must be paid within 30 days of falling due.
How is gratuity calculated in India?
The standard formula is (last drawn monthly salary × 15 × years of service) ÷ 26, where salary means wages as defined by the Code on Social Security — basic pay plus dearness allowance, with any allowances above half of total pay added back. That equates to 15 days' wages per completed year, or about 4.81% of wages for each month of service. For example, an employee on INR 60,000 monthly wages leaving after six years receives approximately INR 207,700. The payout is capped at ₹20 lakh.
Do foreign companies have to pay gratuity to India employees?
Yes, where applicable, once the employee meets the service condition (five years for permanent employees, one year for fixed-term) — the obligation applies regardless of whether the business behind the role is foreign or domestic. If you employ through an EOR, the EOR is the legal employer and manages the gratuity calculation and payment as part of compliant employment, and passes the cost to you. Most early-stage permanent 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 for an employer running its own books. Monthly accrual (~4.81% of wages) sets money aside steadily and suits companies with long-tenure staff. Paying when due — calculating and paying gratuity only when an eligible employee leaves — avoids tying up cash against an obligation that many early-stage hires never reach. SynkPay doesn't pre-collect gratuity each month: it's invoiced to you only when it falls due, and we flag it ahead of eligibility 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.
Does gratuity apply to fixed-term employees in India?
Yes. Under the Code on Social Security, 2020, a fixed-term employee — a direct hire on a written contract for a set period — is entitled to gratuity once they complete one year of service under the contract, calculated pro rata on the same 15-days-per-year formula. This is a change from the old Payment of Gratuity Act, where the five-year rule applied to everyone. If you plan to hire in India on fixed-term contracts, budget for gratuity at the end of each contract of a year or more.