Gratuity Payment: Eligibility, Calculation, and Compliance Norms

Gratuity represents a statutory benefit that acknowledges an employee’s loyalty and dedication to an organization over an extended period. The concept of providing retirement benefits to workers gained legislative recognition when Parliament enacted the Payment of Gratuity Act in 1972, establishing a framework to ensure financial security for employees transitioning out of active employment. This legislation applies to establishments employing ten or more individuals on any single day during the preceding twelve months, creating a legal obligation that persists even if the workforce subsequently falls below this threshold. The Act covers various sectors including factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments, ensuring widespread protection for the Indian workforce.

Legislative Framework and Statutory Provisions

The Payment of Gratuity Act received parliamentary approval on August 21, 1972, and came into force on September 16, 1972[1]. The legislation underwent significant transformation through the Payment of Gratuity (Amendment) Act, 2018, which received Presidential assent on March 28, 2018, and was implemented from March 29, 2018[2]. This amendment represented a watershed moment in employment law by doubling the maximum gratuity ceiling from ten lakh rupees to twenty lakh rupees and aligning maternity leave provisions with contemporary requirements. The amendment empowered the Central Government to revise the gratuity limit through notifications rather than requiring legislative amendments, thereby providing flexibility to address wage inflation and economic changes without procedural delays.

Under Section 4(1) of the Act, gratuity becomes payable when an employee’s service terminates after completing at least five years of continuous service. This applies across various circumstances including superannuation, retirement, resignation, death, or disablement due to accident or disease. However, the five-year requirement is waived when termination results from death or disablement, recognizing the humanitarian aspects of such situations. The Act defines continuous service through Section 2A, where an employee is considered to have rendered continuous service if they have worked for one year comprising 240 working days for establishments involving non-underground work, or 190 days for underground operations such as mining activities. This definition encompasses periods of interruption due to sickness, accident, authorized leave, unauthorized absence, layoff, strike, lockout, or work cessation not attributable to the employee.

Eligibility Criteria and Service Computation

The question of whether employees with four years and seven months of service qualify for gratuity has generated considerable judicial scrutiny. The Supreme Court addressed this ambiguity in landmark rulings including the cases of Mohd. Ali, Mohan Lal, and Surendra Kumar Verma, where it clarified that 240 actual working days in the fifth year equals one full year of deemed service[3]. This interpretation flows from a plain reading of Section 2A(2) of the Act, which states that an employee shall be deemed to be in continuous service for a period if they have worked for not less than 240 days during such period. Consequently, employees who have completed four years plus 240 working days are entitled to gratuity as if they had completed five years of service. This judicial interpretation prevents employers from denying legitimate claims based on narrow calendar-year calculations.

The Act explicitly excludes apprentices from the definition of employees under Section 2(e), but trainee employees cannot be denied gratuity benefits merely because of their designation. The Supreme Court clarified in IREL (India) Limited vs P.N. Raghava Panicker that designating an employee as a trainee while extracting regular work from them and then denying gratuity benefits would defeat the welfare objectives of the Act. Similarly, teachers working in educational institutions gained statutory recognition as employees following the Payment of Gratuity (Amendment) Act, 2009, which retrospectively expanded the definition of employees from April 3, 1997. The Supreme Court upheld this amendment in Independent Schools Federation of India (Regd.) vs Union of India in August 2022, mandating private schools to comply with gratuity obligations toward teaching staff.

Calculation Formula and Maximum Limits

For employees covered under the Act, gratuity calculation follows a statutory formula specified in Section 4(2). The formula is: Gratuity equals fifteen multiplied by the last drawn salary multiplied by the completed years of service, divided by twenty-six. The last drawn salary comprises basic pay plus dearness allowance, excluding other components like house rent allowance, conveyance allowance, or performance bonuses. The divisor twenty-six represents the number of working days in a month, excluding the weekly holiday, typically Sunday. When an employee has worked for more than six months during their final year of service, this period is rounded up and counted as a complete year for gratuity computation. For establishments not covered under the Act but voluntarily providing gratuity, the divisor becomes thirty instead of twenty-six.

The Payment of Gratuity (Amendment) Act, 2018 fundamentally altered the maximum payable amount. Section 4(3) originally capped gratuity at ten lakh rupees, but this ceiling was removed and replaced with a provision empowering the Central Government to specify the maximum amount through official notifications. The Ministry of Labour and Employment issued notification S.O. 1420(E) on March 29, 2018, specifying that gratuity shall not exceed twenty lakh rupees. This enhancement aligned private sector benefits with those available to central government employees under the Seventh Pay Commission recommendations. While twenty lakh rupees represents the statutory maximum, Section 4(5) permits employers to provide higher gratuity amounts through contractual arrangements or company schemes. In such cases, employees are entitled to receive the more beneficial amount between statutory calculation and contractual entitlement.

Maternity Leave and Continuous Service

The amendment of 2018 brought significant changes to how maternity leave affects gratuity calculations. Previously, Section 2A recognized only twelve weeks of maternity leave as continuous service. However, the Maternity Benefit (Amendment) Act, 2017 extended statutory maternity leave to twenty-six weeks, creating a discrepancy between the two legislations. The Payment of Gratuity (Amendment) Act, 2018 addressed this gap by empowering the Central Government to notify the maternity leave period for gratuity purposes. Through notification S.O. 1421(E) dated March 29, 2018, the government specified that maternity leave shall not exceed twenty-six weeks for calculating continuous service[4]. This ensures that female employees who take their full statutory maternity leave do not face disadvantages in gratuity eligibility or quantum calculations.

The legislative intent behind this amendment was to harmonize various labour welfare statutes and eliminate situations where women might lose gratuity benefits due to exercising their maternity rights. By explicitly including twenty-six weeks of maternity leave in the definition of continuous service, the Act prevents employers from treating such absences as breaks in service that could reset the five-year eligibility clock. This provision applies uniformly across all covered establishments, ensuring that working mothers receive equal treatment in retirement benefit calculations regardless of their employer’s size or sector.

Nomination Requirements and Payment Procedures

Section 6 of the Act mandates that every employee who completes one year of service must make a nomination in the prescribed form and manner. The nomination identifies family members who will receive gratuity in the event of the employee’s death. The Act defines family to include spouse, children, dependent parents, and in certain circumstances, dependent siblings. An employee may nominate multiple family members and specify the share of gratuity each nominee should receive. If the employee has a family at the time of nomination, the nomination must favor family members. However, if an employee has no family, they may nominate any person, though such nomination becomes void upon the employee acquiring a family. Employees must submit fresh nominations when existing nominees die or when family circumstances change.

The Payment of Gratuity (Central) Rules, 1972 prescribe detailed procedures for gratuity payment[5]. Rule 7 requires eligible employees to submit applications in Form I to their employer within thirty days of the gratuity becoming payable. Upon receiving such an application, the employer must determine the gratuity amount and issue a notice in Form L specifying the payable amount and fixing a date for payment, which cannot be later than thirty days from the application receipt. The employer must simultaneously inform the controlling authority about the payment details. Payment must occur in cash, demand draft, or bank cheque as preferred by the recipient. If the payable amount is less than one thousand rupees and the recipient desires, payment may be made through postal money order after deducting commission charges. When the nominee or legal heir is a minor, the controlling authority must invest the gratuity amount in term deposits with the State Bank of India or any nationalized bank for the minor’s benefit.

Forfeiture Provisions and Recent Judicial Developments

Section 4(6) of the Act permits gratuity forfeiture in specific circumstances. Subsection (6)(a) allows forfeiture to the extent of damage or loss caused when an employee’s service is terminated for causing damage or destruction to employer property belonging to the establishment. Subsection (6)(b) permits whole or partial forfeiture if services are terminated for riotous or disorderly conduct, acts of violence during employment, or for any act constituting an offence involving moral turpitude committed during employment. The term moral turpitude, though not defined in Indian statutes, has been judicially interpreted to mean conduct contrary to community standards of justice, honesty, and good morals.

The Supreme Court recently clarified the scope of forfeiture provisions in Western Coal Fields Limited vs Manohar Govinda Fulzele decided in February 2025[6]. This judgment addressed conflicting interpretations regarding whether criminal conviction was necessary for forfeiting gratuity under Section 4(6)(b)(ii). The Court held that gratuity can be forfeited when employment is terminated for misconduct constituting an offence involving moral turpitude, even without criminal proceedings or conviction. The Court emphasized that the statute requires only that the disciplinary authority or appointing authority determine whether the proven misconduct would normally constitute an offence involving moral turpitude. The authority must then exercise discretion regarding whether forfeiture should be total or partial based on the gravity of misconduct. However, the Court mandated strict adherence to principles of natural justice, requiring employers to provide notice and consider employee representations before forfeiting gratuity.

In the companion case involving Maharashtra State Road Transport Corporation employees who misappropriated minimal amounts, the Supreme Court took a sympathetic approach and limited forfeiture to twenty-five percent of total gratuity, ordering release of the balance amount. This demonstrates judicial recognition that forfeiture quantum must be proportionate to the severity of proven misconduct. The judgment overruled the earlier interpretation in Union Bank of India and Ors vs C.G. Ajay Babu (2018), which had held that criminal conviction was necessary for forfeiture under Section 4(6)(b)(ii).

Role of Controlling Authority and Dispute Resolution

Section 3 of the Act empowers appropriate governments to appoint controlling authorities for administering the legislation. Typically, Assistant Labour Commissioners and Labour Officers function as controlling authorities, while Deputy Labour Commissioners serve as appellate authorities. When an employer refuses to pay gratuity or disputes the claim, the aggrieved employee, nominee, or legal heir may apply to the controlling authority in Form N within ninety days of the cause arising. The controlling authority possesses powers equivalent to a civil court while conducting inquiries under Section 7(5), including powers to enforce attendance of witnesses, examine them under oath, require document production, receive evidence through affidavits, and issue commissions for witness examination.

After conducting a thorough inquiry and providing reasonable opportunity to both parties, the controlling authority passes orders determining the gratuity amount payable. If the authority finds the claim admissible, it issues a direction in Form R to the employer specifying the amount and directing payment within thirty days from notice receipt. The controlling authority must record detailed findings on the case merits along with the evidence. If the employer fails to comply with the direction, Section 8 empowers the controlling authority to issue a certificate to the Collector, who then recovers the amount as arrears of land revenue along with compound interest at rates specified by the Central Government. This recovery mechanism ensures that employees do not remain deprived of their legitimate dues due to employer non-compliance.

Any person aggrieved by the controlling authority’s order may file an appeal with the appellate authority within sixty days from receiving the order. The appeal must be filed in the prescribed format with a certified copy of the controlling authority’s findings and direction. The appellate authority provides reasonable opportunity for both parties to be heard before recording its decision. Upon receiving the appellate decision, the controlling authority modifies its direction accordingly and issues fresh notices to the employer in Form S specifying the modified amount payable within fifteen days. The grievance redressal mechanism balances employer and employee interests while ensuring expeditious resolution of gratuity disputes.

Compliance Obligations and Penalty Framework

The Act imposes several compliance obligations on covered employers. Within thirty days of the Act becoming applicable, employers must submit notice in Form A to the controlling authority providing details about the establishment including name, address, number of employees, and nature of business. Any changes in these particulars must be intimated through Form B within thirty days of such change. If an employer intends to close the establishment, they must provide sixty days advance notice in Form C to the controlling authority. These requirements enable authorities to maintain oversight of covered establishments and ensure timely intervention when employees’ rights are threatened.

Section 9 prescribes penalties for violations of the Act’s provisions. Any person who makes false statements or deliberately avoids payment or enables others to avoid payment faces imprisonment up to six months or fine up to ten thousand rupees or both. Employers who contravene any provision of the Act or rules face imprisonment of not less than three months which may extend to two years along with potential fines. The Act also provides for appointment of inspectors under Section 7A, who possess powers to enter premises, examine records, conduct investigations, and seize documents. Section 7B makes it legally binding for persons to provide information or documents to inspectors, with non-compliance attracting consequences under Sections 175 and 176 of the Indian Penal Code.

Protection of Gratuity and Overriding Effect

Section 13 provides crucial protection by declaring that no gratuity payable under the Act shall be liable to attachment in execution of any decree or order of any civil, revenue, or criminal court. This ensures that gratuity serves its intended purpose of providing financial security to retired employees and their families, rather than being diverted to satisfy other creditors’ claims. The protected status of gratuity recognizes its character as deferred compensation earned through years of service rather than as ordinary income or assets subject to routine attachment.

Section 14 grants the Act overriding effect over other enactments except where such other provisions are more beneficial to employees. The Supreme Court elaborated on this aspect in BCH Electric Limited vs Pradeep Mehra (2020), holding that Section 4(5) applies only when alternate options exist for the employee under both the Act and contractual terms. The Court held that employees are entitled to receive the higher benefit between statutory entitlement and contractual provisions. However, this does not apply where contractual schemes explicitly exclude employees already covered under the Act, as such schemes provide no genuine alternative option to the statutory right.

The Act’s welfare-oriented nature has been consistently recognized by courts. In Allahabad Bank and others vs All India Allahabad Bank Retired Employees Association (2009), the Supreme Court held that pensionary benefits must include gratuity payment, emphasizing that gratuity is not a discretionary ex-gratia payment but a mandatory statutory obligation. Similarly, in Air India Ltd. vs Appellate Authority (1998), the Bombay High Court ruled that gratuity cannot be withheld from departing employees merely because they failed to vacate service quarters, as refusal to vacate accommodation does not fall within the limited grounds for forfeiture specified in Section 4(6).

Contemporary Relevance and Future Directions

The Payment of Gratuity Act continues evolving to address changing workplace realities. The 2018 amendments demonstrate legislative responsiveness to economic conditions and social policy objectives. By enabling the government to revise gratuity limits through notifications, the Act now possesses built-in flexibility to respond to inflation, wage growth, and future pay commission recommendations without requiring time-consuming parliamentary amendments. This mechanism ensures that gratuity remains a meaningful retirement benefit rather than becoming obsolete due to fixed monetary ceilings.

The incorporation of teachers within the Act’s ambit through the 2009 amendment and its subsequent judicial validation in 2022 expanded social security coverage to a previously excluded professional category. This reflects a broader trend toward inclusive labour welfare legislation that recognizes diverse forms of employment relationships. Similarly, the alignment of maternity leave provisions with the Maternity Benefit Act demonstrates an integrated approach to employment law where different statutes complement rather than contradict each other.

Recent judicial pronouncements, particularly the February 2025 ruling on forfeiture without criminal conviction, provide much-needed clarity to employers regarding disciplinary proceedings and gratuity rights. While empowering employers to forfeit gratuity for serious misconduct without awaiting lengthy criminal trials, courts have simultaneously emphasized procedural safeguards including fair departmental inquiries, natural justice principles, and proportionate forfeiture based on misconduct gravity. This balanced approach protects legitimate employer interests in maintaining workplace discipline while preventing arbitrary deprivation of earned benefits.

The Act’s significance extends beyond individual financial security to encompass broader labor market dynamics. By mandating gratuity payment, the legislation incentivizes long-term employment relationships, reduces workforce turnover, and rewards employee loyalty. These outcomes benefit both workers seeking stable careers and employers desiring experienced, committed workforce. As India’s economy continues evolving with increasing formalization of employment relationships, the Payment of Gratuity Act remains a cornerstone of the social security architecture, ensuring that workers who dedicate years to organizational success receive dignified retirement benefits commensurate with their contributions.

References

[1] Ministry of Labour and Employment. (1972). The Payment of Gratuity Act, 1972. Retrieved from https://labour.gov.in/sites/default/files/ThePaymentofGratuityAct1972.pdf

[2] Ministry of Labour and Employment. (2018). Payment of Gratuity (Amendment) Act, 2018 – Press Note. Retrieved from https://labour.gov.in/sites/default/files/gratuity_press_note.pdf

[3] Lawfluencers. (2025). Gratuity Eligibility in India: 5 Years of Continuous Service. Retrieved from https://lawfluencers.com/gratuity-eligibility/

[4] Government of India. (2018). Payment of Gratuity (Amendment) Act, 2018 – Gazette Notification. Retrieved from https://labour.gov.in

[5] Ministry of Labour and Employment. (1972). The Payment of Gratuity (Central) Rules, 1972. Retrieved from https://labour.gov.in/sites/default/files/rules-1972.pdf

[6] Supreme Court of India. (2025). Western Coal Fields Limited v. Manohar Govinda Fulzele, 2025 INSC 233. Retrieved from https://www.livelaw.in/supreme-court/payment-of-gratuity-act-conviction-in-criminal-case-not-required-for-gratuity-forfeiture-supreme-court-284222

[7] Supreme Court of India. (2022). Independent Schools Federation of India (Regd.) v. Union of India, Civil Appeal No. 8162 of 2012. Retrieved from https://www.greythr.com/notifications/supreme-court-upholds-amendment-to-gratuity-act-covering-teachers/

[8] Supreme Court of India. (2020). BCH Electric Limited v. Pradeep Mehra. Retrieved from https://www.lexology.com/library/detail.aspx?g=5664422f-ede3-42ab-8841-60bacf04db3d

[9] Supreme Court of India. (2009). Allahabad Bank and others v. All India Allahabad Bank Retired Employees Association. Retrieved from https://blog.ipleaders.in/payment-gratuity-act-1972/