Gratuity

Gratuity is a defined statutory benefit paid by an employer to an employee in recognition of continuous service. It is a legal entitlement rather than a bonus, an ex-gratia payment, or a tip.

Since 21 November 2025 it has been governed by Chapter V of the Code on Social Security, 2020. The Code repealed the Payment of Gratuity Act, 1972 along with eight other central statutes, including the Employees' Provident Funds Act, the Employees' State Insurance Act and the Maternity Benefit Act. Documentation citing the 1972 Act is citing a repealed statute, though most of its scheme was carried forward substantially intact.

The point that most needs restating has not changed with the Code. Employers sometimes treat gratuity as a goodwill gesture they can withhold at will. They cannot. Once an employee meets the eligibility conditions, gratuity becomes a debt owed by the establishment, recoverable through the competent authority.

The gratuity provisions apply to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment employing ten or more persons on any day in the preceding twelve months.

One consequence catches employers out and survives into the Code: once the obligation has attached to an establishment, it continues to apply even if headcount later falls below ten. Coverage does not lapse when the workforce shrinks.

An employee becomes eligible on termination of employment after five years of continuous service, where termination includes resignation, retirement, superannuation, or dismissal.

• Resignation counts. Leaving voluntarily does not forfeit gratuity.
• Death or disablement waives the five-year rule. Where service ends because of death or disablement due to accident or disease, gratuity is payable regardless of tenure, to the employee or the nominee.
• Fixed-term employees are the Code's significant addition. A fixed-term employee is entitled to gratuity on a pro-rata basis on completion of the term, without having to complete five years at all. This did not exist under the 1972 Act, and it changes the economics of fixed-term hiring: a two-year fixed-term contract now carries a gratuity cost that the same person on a two-year permanent stint would not have generated.

For counting a year of continuous service, an employee who has worked 240 days in a twelve-month period is generally treated as having completed that year, with a lower threshold for those employed below ground in a mine or in an establishment working fewer than six days a week. Whether an employee with four years and 240 days in the fifth year qualifies was litigated under the old Act with rulings that were not uniform across High Courts. Treat the position as unsettled until it is tested under the Code, and check your jurisdiction before deciding a borderline case.

The formula is unchanged from the 1972 Act.

Service beyond six months in the final year is rounded up to a full year; six months or less is dropped. An employee with 10 years and 7 months is treated as having 11 years; 10 years and 5 months is treated as 10.

What has changed is the meaning of wages, and it changes the answer. Under the Code, wages means basic pay, dearness allowance and retaining allowance, excluding house rent allowance, conveyance, overtime, commission and employer contributions. So far that matches the old basic-plus-DA base. But the definition then adds a condition: where the excluded components together exceed one-half of total remuneration, the excess is added back and counted as wages.

For a conventionally structured salary this changes nothing. For the low-basic structures that are common in Indian payroll, it raises the gratuity base substantially. Here is the same employee under both readings, retiring after 11 years and 7 months, so service rounds to 12 years.

On the old basic-plus-DA base, wages would be ₹35,000, giving ₹35,000 × 15 ÷ 26 × 12 = ₹2,42,308.

Under the Code, the excluded components are ₹65,000 against a one-half threshold of ₹50,000. The excess of ₹15,000 is added back, so wages are ₹50,000, giving ₹50,000 × 15 ÷ 26 × 12 = ₹3,46,154.

The same service and the same payslip produce a gratuity roughly ₹1.04 lakh higher. Multiply that across a workforce and the provisioning consequence is the part worth modelling before the next exit cycle, not after it.

Yes. The Code caps the amount payable as a statutory entitlement, and the Income Tax Act separately caps the amount exempt from tax for non-government employees. Both ceilings stood at twenty lakh rupees under the Payment of Gratuity (Amendment) Act, 2018, and the Code carried that position forward.

Because these ceilings are revised by notification and by successive Finance Acts, confirm the figure currently in force before applying it to a settlement, rather than relying on a figure carried forward in a payroll template. This is worth doing deliberately in the first cycles under the Code, since a higher wage base pushes more employees against the ceiling than the old base did.

An employer may pay more than the ceiling voluntarily. Anything above the exempt limit is taxable in the employee's hands as salary income.

Gratuity must be paid within 30 days of becoming payable. If the employer misses that window, simple interest is payable on the amount for the period of delay.

The scheme of nomination, application, and a written notice of acceptance or rejection carries forward from the 1972 Act. Under that Act the forms ran as follows, and the equivalents under the Code rules serve the same functions.

Confirm the current form names and numbering against the Code's rules before relying on them, since the rules renumber a good deal of the old form apparatus. What does not change is the obligation behind them: an employer must issue a notice even where it disputes the claim. Silence is not a defence, and an unanswered application can be escalated to the competent authority.

Forfeiture is narrow and specific, and the Code keeps the 1972 Act's grounds. Gratuity may be forfeited only to the extent of damage or loss caused, where services were terminated for wilful omission or negligence causing damage to the employer's property. It may be wholly or partially forfeited where services were terminated for riotous or disorderly conduct, or for an offence involving moral turpitude committed in the course of employment.

Poor performance, a disputed notice period, an unreturned laptop, or an outstanding advance are not grounds for forfeiting gratuity. Recoveries of that kind belong in the full and final settlement, not in a refusal to pay a statutory benefit.