Gratuity Before 5 Years: What the Law Actually Says

Most salaried Indians believe this: if you resign before completing 5 years, your gratuity is gone. HR believes it. Finance blogs repeat it. Even your offer letter implies it, by listing gratuity in your CTC as though it only unlocks after a full five years.

The law says something more nuanced — and the difference could mean ₹1 lakh or more in your full and final settlement.

Under Section 2A of the Payment of Gratuity Act, 1972 — now re-enacted in the Code on Social Security, 2020 — an employee doesn’t need to work every calendar day of the year to be considered “in continuous service.” Work 240 days in a 12-month period, and the law treats that as a full year. Multiple High Courts have confirmed that 4 years and 240 days in the fifth year satisfies the 5-year requirement for gratuity.

What this means in plain English: if you’ve worked 4 years and roughly 8 months, you may be legally entitled to gratuity. And your HR team may have no idea — or may be hoping you don’t either.

What the law actually says about “5 years”

The base rule hasn’t changed. Under the Code on Social Security, 2020 (which replaced the Payment of Gratuity Act, 1972, effective 21 November 2025), gratuity becomes payable after 5 years of continuous service. Resign at 4 years and 11 months, and the plain reading gives you nothing.

But “continuous service” is not the same as “365 days × 5.”

Section 2A of the old Gratuity Act — preserved in the Social Security Code — defines continuous service using a deemed year concept. An employee is treated as having completed one year of continuous service if, in the preceding 12 calendar months, they have actually worked:

240 days — in any standard establishment (factory, shop, office) or one that operates 6 days a week
190 days — for underground mine workers or establishments that operate fewer than 6 days a week

The critical question: does this 240-day deeming provision also apply to the fifth year specifically, for the purpose of determining eligibility for gratuity?

Multiple courts have said: yes, it does.

What the courts have ruled — and why it matters

Madras High Court — Mettur Beardsell Ltd. v. Regional Labour Commissioner (1998 LLR 1072)

This is the foundational case. An employee had completed 4 years, 10 months, and 18 days of service. The employer argued this fell short of 5 calendar years, so no gratuity was payable. The Madras High Court disagreed.

The court applied Section 2A directly to the fifth year. Since the employee had worked more than 240 days in their fifth year of service, the court deemed that fifth year complete. Four full prior years plus one deemed fifth year satisfied the statutory requirement. Gratuity was ordered to be paid.

Kerala High Court — Sreeja v. Regional Joint Labour Commissioner (2015 LLR 826)

The Kerala High Court reinforced this position. It confirmed that Section 2A is a deeming provision — once the 240-day threshold is met in any 12-month window, the law treats it as a completed year, regardless of calendar dates. A rigid arithmetic interpretation of “five years,” the court held, is neither what the statute intends nor what fairness demands.

The current legal consensus

As NKR Law Offices analyses in their study of these judgments, rigid denial of gratuity on the grounds of “not completing five calendar years” may be legally untenable when 240 days in the fifth year can be demonstrated. Labour authorities across India are likely to rule in favour of the employee in such cases.

There is no Supreme Court ruling that directly contradicts this principle. Until there is, the 240-day position is treated as settled law by Controlling Authorities under the Gratuity Act. The 240-day rule also finds resonance in Section 25B of the Industrial Disputes Act, 1947, which uses the same benchmark to define one year of continuous service.

Three situations where you can claim gratuity before 5 years

The law carves out specific exceptions where the 5-year rule either doesn’t apply at all, or where a shorter period legally satisfies it.

Situation 1: 4 years + 240 days in the fifth year (resignation)

If you’ve completed 4 full years and then worked at least 240 actual days in your fifth year, you’ve technically completed 5 years of service under Section 2A. Courts have consistently held this triggers gratuity eligibility. HR may push back. The legal position is on your side.

Situation 2: Death during service

If an employee passes away during employment, gratuity is payable to the registered nominee regardless of tenure. One month. One year. Doesn’t matter. The nominee is entitled to the full calculated amount, and there is no minimum service requirement. The nominee can also file a complaint with the Controlling Authority (Regional Labour Commissioner) if the employer delays payment.

Situation 3: Permanent disability

If you’re permanently disabled due to an accident or disease and can no longer perform the job you were hired for, gratuity is payable immediately. No minimum service period. No five-year requirement.

The November 2025 rule change: fixed-term employees

Under the Code on Social Security, 2020, which came into force on 21 November 2025, employees hired on a formal, written fixed-term contract are now eligible for pro-rata gratuity after completing just 1 year of continuous service.

Previously, contract workers had to meet the same 5-year bar as permanent employees — which was effectively impossible given that fixed-term contracts typically run for 1–3 years. The new law changes that.

So if you’re on a 2-year fixed-term contract and your engagement ends, you are now entitled to pro-rata gratuity based on the 15/26 formula applied to your 2 years of service.

Important: This applies only to employees who have a documented fixed-term employment contract. Employees on informal or rolling short-term arrangements without a formal written agreement defining the fixed term do not automatically fall under this provision. If you’re on a project-based contract, check the exact language of your agreement with your employer.

How to actually count your 240 days

240 days sounds like a precise number. Counting them is where most employees make mistakes.

Under Section 2A, your “days worked” is broader than just days you physically sat at your desk. It includes all paid leave days, sick leave, maternity leave, national and public holidays, and even days on which you were laid off by the employer (if the layoff wasn’t your fault). Strike days count too, as long as the strike itself wasn’t illegal.

What does not count: unauthorized absence, days you abandoned duty without leave, or any period of suspension pending inquiry where you were later found guilty.

One thing HR often gets wrong: probation counts. If you were on probation for the first 6 months of your employment and then confirmed, your tenure for gratuity purposes runs from Day 1 of your probation — not from the date of confirmation. This is a well-established legal position.

Here’s the practical thing to do: log into your company’s HRMS (the employee portal, typically a system like Darwinbox, Keka, or Workday) and pull your full attendance records. Look at your fifth year specifically — count all present days, paid leaves, and holidays. If the number is 240 or above, you have grounds to claim.

Quick reference: are you eligible?

Your situation	Gratuity eligibility?
Resigned with exactly 4 calendar years completed	Not eligible (unless on formal fixed-term contract from Nov 2025)
Resigned with 4 years + fewer than 240 days in fifth year	Not eligible by law — but count your days carefully before accepting HR’s word
Resigned with 4 years + 240 or more actual working days in fifth year	Likely eligible under Section 2A — grounds exist to claim
Resigned with 5+ full years completed	Clearly eligible
Death or permanent disability during service (any tenure)	Eligible, no minimum service required
Fixed-term contract employee with 1+ year (contract ending after Nov 21, 2025)	Eligible for pro-rata gratuity

What HR tells you — and the legal reality

Most HR teams, when you resign before 5 years, simply state: “Gratuity is not applicable since you haven’t completed 5 years.” No explanation offered. No distinction made between calendar years and service days. Here’s what you’re likely to hear — and what the law actually says:

“You need to complete 5 full years to the date.”

Legally incorrect if you’ve completed 4 years and 240 actual working days in the fifth year. The 240-day deeming provision is written into the statute, not a discretionary exception. If HR says this, ask them specifically to show you the clause under which they’re denying the claim. Most cannot.

“Your gratuity will be adjusted against your notice period shortfall.”

This is illegal. Gratuity cannot be legally offset against unpaid notice pay, outstanding loans, or any other dues. The law treats these as entirely separate obligations. Courts have repeatedly upheld this — your employer can pursue notice pay recovery through civil means, but cannot touch your gratuity.

“We need time to process this.”

Under the law, your employer has 30 days from the date gratuity becomes due to make the payment. If they exceed this — even by a day — they owe you simple interest at 10% per annum on the unpaid amount. This is statutory, not negotiable. Keep a written record of when you submitted your claim. It determines when the 30-day clock starts.

The gratuity formula when you qualify early

If you qualify under the 240-day rule, the calculation is identical to any other eligible resignation. The formula is:

Gratuity = (Last Drawn Salary × 15 × Completed Years of Service) ÷ 26

Where:

Last Drawn Salary = Basic Pay + Dearness Allowance (DA) only. Not HRA, not special allowances, not bonus.
Completed years = Number of full years; a final partial year exceeding 6 months rounds up to a full year. This applies both to eligibility (reaching the 240-day mark in year 5 makes it a full year) and to calculation.
26 = Working days assumed in a month. This is statutory — don’t let anyone use 30.

An illustrative example to make this real: Ramesh works at a mid-size IT services firm in Bengaluru. His Basic + DA at the time of resignation is ₹35,000/month. He has completed 4 full years and 257 actual working days in his fifth year.

He clears the 240-day threshold in year 5 → legally qualifies under Section 2A
His fifth year with 257 days exceeds 6 months → rounds up to a full year for calculation
Total service for calculation: 5 years
Gratuity = (35,000 × 15 × 5) ÷ 26 = ₹1,00,961

That’s ₹1 lakh Ramesh’s HR would have simply not paid — had he not known what the law actually says.

Tax treatment of early gratuity

For gratuity received upon death or permanent disability — the two scenarios where the 5-year rule is fully waived — the entire amount is tax-exempt with no monetary ceiling, under Section 10(10) of the Income Tax Act. This is confirmed on the Income Tax Department’s threshold limits page.

For gratuity received under the 240-day legal argument (upon resignation), the standard tax rules apply:

Private sector employees covered under the Gratuity Act: up to ₹20 lakh is tax-exempt — under both the old and new income tax regimes
Government employees: entire amount is fully tax-exempt, no ceiling
The ₹20 lakh limit is a lifetime cumulative limit across all employers — not per job. Keep track of this number across your career

For most employees claiming gratuity after 4+ years, the amounts will typically be well under ₹20 lakh, so in practice the gratuity would be fully tax-free.

One thing most people miss: Section 89(1) relief. If receiving gratuity pushes your total income significantly higher in the year of receipt — especially at retirement or after long service — you may be eligible to claim relief under Section 89(1) of the Income Tax Act, which spreads the tax liability over the years the income relates to. Ask your CA about this when filing the relevant ITR.

Regardless of whether your gratuity is taxable or exempt, always declare it in your ITR filing. It will appear in Form 16 issued by your employer. Not declaring exempt income — even when no tax is due — can trigger a notice from the Income Tax Department.

When your employer refuses to pay: what to do

If your employer denies gratuity after a valid claim — citing “not 5 years” when you’ve completed 4 years + 240 days, or for any other legally indefensible reason — here is the exact process:

Step 1: Submit a formal gratuity claim using Form I

Form I is the prescribed written application form for claiming gratuity under the Payment of Gratuity Act. Send it to your employer (HR department, addressed to the employer in writing) within 30 days of leaving. You can find Form I on the Central Labour Commissioner’s website. This creates a formal paper trail and starts the 30-day payment clock.

Step 2: File a complaint with the Controlling Authority

If the employer refuses or ignores your Form I, file a complaint with the Controlling Authority — in most cases, the Regional Labour Commissioner (Central) in your area. File within 90 days of the employer’s refusal or non-payment. The authority has the power to determine the payable amount and order the employer to release it. If the deceased employee’s nominee is filing (in a death case), they can also use this route.

Step 3: Claim interest on delayed payment

If your employer delays payment beyond 30 days from the date gratuity was due, you are entitled to simple interest at 10% per annum on the unpaid amount for every day of delay. This is statutory — you do not need to negotiate for it. Mention it explicitly in your complaint filing.

Step 4: Appeal if needed

If you disagree with the Controlling Authority’s order, you can appeal to the Appellate Authority — typically the Central Government Industrial Tribunal or the appropriate Labour Court in your state. Get a qualified labour lawyer to assist at this stage.

What to do right now

Know your 240-day number before you resign. If you’re approaching 4 years of service and considering a job change, log into your company’s HRMS portal and pull your full attendance record for your fifth year. Count working days, paid leaves, and holidays. If you’re at 240 or above, you may be entitled to gratuity. This calculation takes 20 minutes and could recover lakhs.
Don’t confuse your calendar anniversary with your legal service date. Your joining date, probation period, and actual attendance all feed into the calculation. Probation counts. Paid leave counts. Check your offer letter for your exact joining date — that’s Day 1 of your service.
Send Form I in writing on your last working day. Don’t wait to see if HR brings up gratuity. Send Form I by email (PDF attached + in the body of the email) to HR on your last working day or within 30 days of leaving. This creates a formal record and starts the 30-day clock. Save the email.
Get your full and final settlement details in writing. Ask HR to specify in email whether gratuity has been included in your final settlement, and if not, the specific legal grounds for exclusion. Vague verbal assurances are useless if you later need to file a complaint.
If you’re on a fixed-term contract, check your contract date. If your fixed-term contract ends or ended after 21 November 2025 and you’ve completed at least 1 year, you’re entitled to pro-rata gratuity under the Code on Social Security. Read your contract carefully — the word “fixed-term” or “contract for specific duration” should be present in writing.
Update your gratuity nominee. If your life situation has changed since joining — marriage, children, death of a family member — your nomination form may be outdated. The nominee is the person who receives gratuity if you die during service, regardless of how long you’ve worked. Submit an updated Form F with HR. It takes 10 minutes and matters enormously.

Disclaimer: This article is based on the Payment of Gratuity Act, 1972, the Code on Social Security, 2020 (effective 21 November 2025), judicial interpretations by the Madras and Kerala High Courts, and publicly available income tax provisions as of August 2026. The 240-day eligibility principle is supported by multiple High Court rulings; the Supreme Court has not issued a direct, final ruling on this specific question — outcomes in individual cases may vary. Individual eligibility depends on your exact employment terms, attendance records, contract type, and applicable state notifications. This article is for general financial and legal education only and does not constitute legal or tax advice. Consult a qualified labour lawyer or chartered accountant for your specific situation.

Sources: Section 2A, Payment of Gratuity Act, 1972 — Central Labour Commissioner, Government of India * Gratuity Eligibility After 4 Years and 240 Days — NKR Law Offices (June 2025) * Code on Social Security 2020 — India Code, Ministry of Law and Justice * Analysis: Code on Social Security 2020 — Taxmann (November 2025) * Gratuity eligibility rules India 2026 — FinanceToolsPro (April 2026) * India’s New Labour Codes expand gratuity rules — Fisher Phillips (March 2026) * Threshold limits under Income Tax Act — Income Tax Department, Ministry of Finance (2026)

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Kunal Kundu

Kunal Kundu is a salaried professional from Pune, Maharashtra, with over 16 years of work experience. He has been investing since 2012 — starting with stocks and later expanding into mutual funds, options trading, and systematic tax planning.
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.