Gratuity Policy Template: Eligibility and Calculation

A gratuity policy explains how the company pays gratuity under the Code on Social Security: who is eligible, how the amount is calculated, how nominations work and how payment is made at exit, retirement or death. The law sets the core rules, including eligibility after five years of continuous service and 15 days' wages for each completed year, so the policy's job is to apply them clearly and consistently.

When to use it: Use it when your establishment comes under gratuity, when you set up a gratuity fund or insurance scheme, when fixed-term hiring starts, or when exit settlements raise questions about eligibility. Finance and HR draft it, and the finance head approves it along with the funding arrangement.

Gratuity policy template

Copy the text below and replace everything in square brackets with your company details.

1. Purpose

This policy sets out how [Company Name] pays gratuity to employees under the Code on Social Security, and the process for nomination, calculation and payment.

2. Scope

It applies to all employees covered by the gratuity provisions of the Code on Social Security, including fixed-term employees.

3. Eligibility

An employee becomes eligible for gratuity after five years of continuous service with the company, when employment ends by resignation, retirement or termination.
A fixed-term employee receives gratuity pro rata for the period of service, without the five-year minimum.
On death or disablement, gratuity is paid as the Code on Social Security provides for those events, to the nominee or legal heirs in the case of death.
Gratuity is forfeited, wholly or partly, only in the circumstances and to the extent the law permits, and only after due process.

4. Calculation

Gratuity = 15 days' wages x completed years of service, based on the last drawn wages.
Wages for gratuity mean [basic pay plus dearness allowance], together with any allowances added back because basic pay plus DA is below half of total remuneration under the Code on Wages.
Example: an employee whose last drawn wages work out to ₹1,000 a day and who completed 8 years of service receives 15 x ₹1,000 x 8 = ₹1,20,000.
For fixed-term employees, the same formula is applied to the period of service actually completed.

5. Nomination

Each employee files a gratuity nomination within [30] days of becoming covered and updates it after marriage or other family changes.
Nominations are kept on the employee's file, and the employee receives a copy.

6. Payment

HR calculates gratuity with the full and final settlement and shares the working with the employee.
Gratuity is paid within the time limit set under the Code on Social Security, by bank transfer to the employee or the nominee.
Tax on gratuity is handled as per income tax rules, including any exemption that applies.

7. Funding

The company funds its gratuity liability through [a group gratuity scheme with an insurer, a gratuity trust or provisions in the accounts], reviewed every year by finance with an actuarial valuation where required.

8. Service records

HR keeps continuous service records, including breaks and approved long leave, so that eligibility can be confirmed at exit without dispute.

9. Responsibilities

HR: track service dates, collect nominations and calculate gratuity at exit.
Finance: fund the liability and make payments on time.
Employees: keep nominations current and share correct family details.

10. Review

Finance and HR review this policy whenever the gratuity rules under the Code on Social Security change, and review the funding arrangement every year.

What to include

Eligibility from the law

Gratuity is due after five years of continuous service, and fixed-term employees get it pro rata without the five-year minimum. Read the gratuity eligibility and calculation rules and mirror them in the policy.

The wage base

Gratuity uses the last drawn wages. Under the Code on Wages, if basic pay plus DA is below half of total remuneration, the excess allowances are added back, which raises gratuity, so check structures before relying on basic pay alone.

A worked example

Show the formula with numbers: 15 days' wages multiplied by completed years. Employees can check their entitlement with the gratuity calculator, and a worked example prevents arguments at exit.

Nominations

Collect nominations early and prompt updates after marriage or births. Without a valid nomination, payment to the family after a death in service can be delayed.

Funding the liability

Gratuity is a long-term liability that grows with service and salary. Decide how it is funded, for example through an insurer's group scheme, so that several large exits do not strain cash flow.

Continuous service records

Keep clear records of joining dates, breaks and long leave. Gratuity disputes often turn on whether service was continuous for five years.

Common mistakes to avoid

Denying gratuity to fixed-term employees because they served less than five years.
Calculating gratuity on basic pay alone when allowances must be added back to wages.
Using an old wage figure instead of the last drawn wages.
Collecting no nominations until an employee dies in service.
Leaving the liability unfunded until a group of long-serving employees retires together.

Run it in ZeniaHR

ZeniaHR Reports include gratuity and settlement reports, and the employee record holds the joining date, lifecycle history and exit date that decide continuous service. Nominee details sit on the employee profile, and signed nomination forms are stored in employee documents. Recording a resignation sets the last working day and moves the employee to on notice, so HR can prepare the gratuity working alongside the full and final settlement.

Payroll Employee records and exits Employee documents

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Frequently asked questions

Who is eligible for gratuity in India?

An employee who completes five years of continuous service is eligible for gratuity when employment ends. Fixed-term employees receive gratuity pro rata for their period of service without the five-year minimum. Gratuity is calculated at 15 days' wages for each completed year on the last drawn wages.

How is gratuity calculated?

Multiply 15 days' wages by the number of completed years of service, using the last drawn wages. For example, if last drawn wages work out to ₹1,200 a day and the employee completed 10 years, gratuity is 15 x ₹1,200 x 10 = ₹1,80,000. The gratuity entry explains the terms.

Do fixed-term employees get gratuity?

Yes. Fixed-term employees get gratuity pro rata for the period they served, without the five-year minimum that applies to other employees. A fixed-term worker holds full employee status, so include them in your gratuity calculations and in the funding of the liability.

Can gratuity be forfeited?

Only in the limited circumstances the law permits, such as certain serious misconduct, and only to the extent the law allows after due process. The policy should not add wider forfeiture grounds of its own. Take legal advice before withholding gratuity in any case.