Gratuity Act India HRMS Compliance — Calculation and Payment 2026

Gratuity Act India HRMS Compliance — Calculation and Payment 2026

The Payment of Gratuity Act 1972 mandates gratuity as a statutory right for eligible employees. Any establishment with 10 or more employees is covered — and once covered, remains covered even if headcount drops below 10. Gratuity disputes are among the most common labour litigation matters in Indian courts — usually because employers compute gratuity incorrectly or delay payment beyond the statutory 30-day window.

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Gratuity Eligibility

Who Is Eligible
An employee who has completed 5 or more years of continuous service with the same employer is entitled to gratuity on:
- Resignation
- Retirement or superannuation
- Death (payable to nominee/legal heir)
- Disablement (due to accident or disease)

The 5-Year Rule Exception
For death or disablement, gratuity is payable even if service is less than 5 years. An employee killed in a workplace accident in year 3 is still entitled to gratuity.

Contract Employees
The Act applies to the number of days worked, not the nature of employment. Contract workers who have continuously worked for 5 years are entitled to gratuity from the principal employer in some interpretations — this is an area of active litigation.

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Gratuity Calculation Formula

Gratuity = (Last drawn basic salary + DA) × 15/26 × number of completed years of service

Key components:
- Last drawn basic salary: at the time of exit (not the salary throughout service)
- 15 days: 15 working days per year of service
- 26: working days per month (denominator)
- Completed years: 6 months or more in the last year counts as a full year

Maximum Gratuity
Rs. 20 lakh is the maximum gratuity payable under the Act (revised from Rs. 10 lakh). Employers can pay more as an ex-gratia benefit above this cap — the tax exemption limit is also Rs. 20 lakh.

Taxability
Gratuity up to Rs. 20 lakh is tax-exempt for non-government employees. Amount above Rs. 20 lakh is taxable as salary.

Payment Timeline
Gratuity must be paid within 30 days of the date it becomes payable. Delayed payment attracts simple interest at 10% per annum.

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MICS HRMS Gratuity Features

Continuous Service Tracking
- Joining date recorded at onboarding
- Break in service: leaves without pay, sabbatical, unauthorized absence — impact on continuous service
- Effective service years: system computes at any point — years, months, days
- 5-year eligibility alert: notify HR when employee crosses 5-year mark

Gratuity Computation
- At exit: trigger from exit management module
- Formula applied: last basic × 15/26 × completed years
- Completed year computation: automatic rounding (6+ months = 1 year)
- Tax exemption: Rs. 20 lakh limit — compute taxable portion if gratuity exceeds cap
- TDS on taxable portion: computed and deducted from gratuity payment
- Death / disablement: waives 5-year requirement, computes based on actual service

Gratuity Fund and Trust Management
- Group Gratuity Insurance: integration with LIC or private insurer for group gratuity policy
- Actuarial valuation: annual computation of gratuity liability for accounting purposes
- AS 15 (Revised) / Ind AS 19: gratuity liability computation for financial statement disclosure
- Funded vs. unfunded: track whether gratuity fund is maintained or from general funds

Statutory Forms
- Form I (Gratuity Application by Employee): generated on employee's request at exit
- Form J (Employer's Acknowledgement): employer acknowledges gratuity application
- Form L (Notice of Payment): payment details with amount and date
- Form F (Nomination): employee nominates beneficiary at joining — stored in system
- Form M (Dispute Notice): if employee disputes employer's computation

Payment Processing
- Gratuity payment via payroll: included in Full and Final Settlement
- Separate payment: for cases where gratuity is paid separately after exit
- Receipt and acknowledgement: store employee's acknowledgement of receipt

Gratuity Register
- Employee-wise gratuity entitlement at current salary
- Year-wise gratuity liability: total outstanding gratuity payable to all employees
- Gratuity payments made: historical record of all gratuity disbursements

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Full and Final Settlement Integration

Gratuity is part of the Full and Final Settlement (FnF) computation:
- Earned leave encashment + Gratuity + Outstanding salary + Variable pay - Advances/loans = Net payable
- FnF computation from MICS HRMS: all components computed and payment instruction generated

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Pricing

- Gratuity module: included in full MICS HRMS subscription
- Actuarial valuation facilitation (annual): Rs. 20,000 (MICS connects with actuary, coordinates data)

Free gratuity compliance demo: +91 9355273535 | admin@mics.asia