Gratuity in India: Who Qualifies, How It Is Calculated, and When It Can Be Forfeited

Gratuity is one of the few payments an Indian employee earns simply by staying. It is not a performance bonus and it is not discretionary. Once the Payment of Gratuity Act, 1972 applies to your establishment and you satisfy the qualifying conditions, gratuity becomes a statutory debt owed to you. Employers still treat it as something they may withhold at will, a pattern we see across employment and labour matters, and employees still walk away from it because nobody told them the gratuity rules or the deadline to claim.

When the Payment of Gratuity Act applies to you

Section 1(3) of the Act sets the threshold. It applies to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment in which ten or more persons are employed, or were employed on any day in the preceding twelve months. The Act also applies to such other establishments as the Central Government notifies.

Two consequences follow that employees routinely miss. First, once the Act has applied to an establishment it continues to apply even if the headcount later falls below ten. The obligation does not switch off when the workforce shrinks. Second, the ten person count is of persons employed, not of employees on a particular payroll structure, so an employer cannot escape the Act by describing part of its workforce as consultants while treating them as employees in substance.

Section 2(e) defines who is an employee. It covers any person employed for wages in any kind of work, manual or otherwise, in connection with the work of the establishment, whether the terms of employment are express or implied. Apprentices are excluded. Notably, the definition is not limited by salary. A senior manager earning a large package is as much an employee for this Act as a shop floor worker, whatever the employment agreement calls the role, which is why gratuity disputes reach every level of the organisation chart.

The five year rule, and the 240 day question

Section 4(1) is the eligibility provision. Gratuity is payable to an employee on termination of employment after he has rendered continuous service for not less than five years, where the termination is on superannuation, on retirement or resignation, or on death or disablement due to accident or disease.

The proviso is the part people forget. The five year requirement does not apply where employment ends because of death or disablement. A family that loses an earning member after two years of service is still entitled, and the gratuity is payable to the nominee or legal heirs. In my experience this is the single most under claimed entitlement in Indian employment law, because grieving families do not know to ask.

What counts as continuous service is defined by Section 2A. Where an employee is not in continuous service for a full year, he is deemed to be in continuous service if he has actually worked for not less than 240 days in that year, or 190 days in an establishment working fewer than six days a week or in an underground mine. Periods of layoff, authorised leave, maternity leave and absence due to an employment injury are counted, not deducted.

Key takeaway: the five year clock is about continuous service under Section 2A, not about a neat calendar count. Interruptions that were the employer's doing, or that the statute protects, do not break it.

This produces the well known question: does four years and 240 days qualify? The Madras High Court has taken the view that where an employee completes 240 days in the fifth year, that year is treated as a completed year of continuous service, so the employee qualifies. That reasoning is persuasive and often relied on, but it has not been uniformly adopted across all High Courts and it is not a Supreme Court holding. The practical position I give clients is this: if you have crossed four years and 240 days, you have a genuine claim worth pressing, but do not treat it as settled entitlement. If you have any control over your exit date and you are close to the line, cross five full years and remove the argument entirely.

How gratuity is calculated

Section 4(2) sets the formula. For every completed year of service, or part of a year in excess of six months, the employer pays gratuity at the rate of fifteen days wages based on the rate of wages last drawn.

For a monthly rated employee, the fifteen days wages are calculated by dividing the monthly wages by twenty six and multiplying by fifteen. The divisor of 26 rather than 30 exists because the statute assumes four weekly offs in a month. This single number is where most employer calculations quietly go wrong, always in the employer's favour.

"Wages" for this purpose means basic wages plus dearness allowance. It does not include bonus, commission, house rent allowance, overtime or other allowances. Employers who have engineered salary structures with a small basic and a large allowance component will produce a smaller gratuity figure, and that is lawful as the Act stands, though it has been the subject of litigation in the provident fund context.

Category	Formula	Note
Monthly rated employee covered by the Act	(Last drawn monthly wages / 26) x 15 x completed years	Part year over 6 months counts as a full year
Employee in a seasonal establishment	7 days wages for each season	Section 4(2) proviso
Piece rated employee	Based on average of total wages for 3 months preceding termination	Overtime wages excluded from the average
Employee NOT covered by the Act (paid ex gratia or by contract)	Usually (Basic + DA) / 30 x 15 x completed years	Governed by the contract or company policy, not the statute. Divisor is commonly 30 and part years are usually not rounded up

Three worked examples

Assume in each case that the employee is monthly rated and covered by the Act, and that wages means basic plus dearness allowance.

Scenario	Last drawn wages	Service	Calculation	Gratuity
Junior employee, clean exit	Rs 26,000	6 years 4 months	(26,000 / 26) x 15 x 6	Rs 90,000
Mid level, part year over six months	Rs 52,000	8 years 7 months, counted as 9	(52,000 / 26) x 15 x 9	Rs 2,70,000
Senior employee, ceiling engaged	Rs 2,60,000	25 years	(2,60,000 / 26) x 15 x 25 = Rs 37,50,000, capped	Rs 20,00,000

Note what the second row does. Eight years and seven months is not eight years. The seven months exceed six, so the year is completed for the purpose of the formula and the multiplier is nine. Employers frequently round down here, and employees frequently accept it.

The ceiling, and the separate tax question

Section 4(3) caps the amount payable under the Act. The ceiling was raised to Rs 20 lakh by the Payment of Gratuity (Amendment) Act, 2018. Anything an employer pays above the ceiling is lawful but is a contractual or ex gratia payment, not a statutory one.

The tax treatment is a separate question governed by Section 10(10) of the Income-tax Act, 1961, and the two limits should not be confused. For employees covered by the Payment of Gratuity Act, the exemption limit was raised to Rs 20 lakh by notification S.O. 1420(E) dated 29 March 2018. Gratuity received by government employees is dealt with separately and more favourably. Two practical points follow: the exemption is a lifetime cumulative limit across all employers, not a fresh limit at each job, and any amount above the exemption is taxable as salary in the year of receipt.

Practice note: if you are negotiating an exit package that includes a gratuity component above Rs 20 lakh, get the tax position modelled before you sign, not after. The excess is taxable and the timing of receipt can matter.

Forfeiture: what changed in 2025

Section 4(6) is the only lawful route to reducing or refusing gratuity, and it is narrow. It has two limbs.

Under Section 4(6)(a), gratuity may be forfeited to the extent of the damage or loss caused, where the employee's services have been terminated for any act, wilful omission or negligence causing damage, loss or destruction of the employer's property. The forfeiture is limited to the extent of that damage. It is not a licence to withhold the whole amount.

Under Section 4(6)(b), gratuity may be wholly or partially forfeited where the employee's services are terminated for riotous or disorderly conduct or any other act of violence, or for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

For years the operative question was whether that second limb required a criminal conviction. In Union Bank of India v C.G. Ajay Babu (2018) the Supreme Court's approach was read by many as requiring the offence to be established in a criminal court. Employers who forfeited gratuity on the strength of a departmental enquiry alone frequently lost.

That position was revisited in Western Coal Fields Ltd v Manohar Govinda Fulzele, reported at 2025 SCC OnLine SC 345, decided by a Bench of Justices Sudhanshu Dhulia and K. Vinod Chandran. The Court was dealing with two sets of facts: an employee of Western Coal Fields who had secured his employment using a fraudulent birth certificate, and conductors of the Maharashtra State Road Transport Corporation who had misappropriated passenger fares. In both, the forfeiture had been struck down below for want of a criminal conviction.

The Supreme Court held that Section 4(6) does not require a criminal conviction. The statute speaks of an act which constitutes an offence involving moral turpitude, and an offence, in the sense used by the General Clauses Act, 1897, is an act or omission made punishable by law. What matters is the character of the act, not whether a criminal court has pronounced on it. A misconduct established in a properly conducted departmental enquiry can therefore support forfeiture.

Two guardrails came with that holding. First, the enquiry must be fair and the employee must have had a real opportunity to defend himself, the same standard that governs any termination for misconduct. Second, forfeiture must be proportionate. On the facts, the Court allowed full forfeiture where the employment itself had been obtained by fraud, but limited the forfeiture in the transport corporation matter to 25 per cent, directing release of the balance.

Common mistake: employers read this ruling as permission to withhold gratuity whenever there is an allegation. It is not. Forfeiture still requires termination on that ground, a fair enquiry, an act that genuinely involves moral turpitude, and proportionality between the misconduct and the amount withheld.

Provision	What it says	Why it matters to you
S.1(3)	Act applies to establishments with 10 or more employees	Once it applies, it keeps applying even if headcount falls
S.2(e)	Definition of employee	No salary ceiling. Seniority is irrelevant to entitlement
S.2A	Continuous service, 240 days rule	Protected absences do not break your service
S.4(1)	Eligibility on superannuation, retirement, resignation, death or disablement	The 5 year rule is waived for death and disablement
S.4(2)	15 days wages per completed year, divisor 26	The most commonly miscalculated provision
S.4(3)	Ceiling of Rs 20 lakh	Anything above is contractual, not statutory
S.4(6)	Forfeiture grounds	The only lawful basis for withholding
S.7	Determination and payment, application to Controlling Authority	Your recovery route when payment is refused
S.8	Recovery as arrears of land revenue	Gives the order real teeth
S.13	Protection against attachment	Gratuity cannot be attached in execution of a decree

Getting paid: the process when the employer refuses

The Act does not leave payment to the employer's goodwill. Under Section 7, the employer must determine the amount of gratuity as soon as it becomes payable and give notice to the person entitled and to the Controlling Authority, whether or not an application has been made. Gratuity must be paid within thirty days from the date it becomes payable. If it is not, the employer is liable to pay simple interest from the due date until payment.

1. Send a written claim. Apply to the employer in the prescribed form, ordinarily within thirty days of gratuity becoming payable. Keep proof of dispatch and delivery. An application is not rejected merely because it is late if sufficient cause is shown, so do not abandon a genuine claim because you missed a date.
2. Wait for the determination. The employer must compute the amount and notify you. Silence is itself a refusal you can act on.
3. Apply to the Controlling Authority. Where the employer refuses, disputes the amount, or simply does not pay, apply to the Controlling Authority appointed for the area. This is an accessible forum and you are not required to be represented by a lawyer, though it helps once the employer raises a forfeiture defence.
4. Contest the forfeiture, if raised. Ask for the enquiry record, applying the same fair procedure principles that govern a workplace enquiry. Forfeiture must rest on termination for a Section 4(6) ground, established in a fair enquiry, and must be proportionate. Each of those is a separate point of attack.
5. Obtain the direction and enforce it. The Controlling Authority determines the amount payable with interest. Under Section 8, an unpaid amount is recovered by the Collector as arrears of land revenue, which is why these orders are worth pursuing. The mechanics resemble the execution of any money decree.
6. Appeal if required. An appeal lies under Section 7(7) within sixty days, extendable by a further sixty days for sufficient cause. An employer appealing is ordinarily required to deposit the amount.

Contract staff, fixed term employees and who is actually liable

Gratuity questions get difficult when the worker sits between two entities. A few working principles help.

Contract labour. Where a worker is engaged through a contractor, the contractor is ordinarily the employer for gratuity purposes. Where the contract is a sham and the principal employer in truth controls the work, the principal employer can be fixed with liability. Courts look at who controls, who pays, who disciplines and who can terminate, which is why the wording of the underlying service agreement matters so much.

Fixed term employees. A fixed term employee whose term ends is not thereby disentitled. If the employee has completed the qualifying continuous service, gratuity is payable. Repeated short term contracts with the same employer often add up to continuous service, and employers who churn contracts to defeat entitlement are frequently unsuccessful when the pattern is shown.

Apprentices. Excluded by the definition in Section 2(e). A trainee who is in substance doing an employee's work under an employment contract is not, however, converted into an apprentice merely by the label on the letter.

Transfer of undertaking. Where a business is transferred and service is treated as continuous, the past service ordinarily carries over. The documentation at the point of transfer decides most of these disputes, so employees should retain the transfer letter.

Nomination: the paperwork that decides who gets paid

Nomination is the most neglected step in the whole scheme, and it only matters at the worst possible moment. An employee who has completed one year of service is required to file a nomination with the employer in the prescribed form, and may distribute the amount among more than one nominee. Where the employee has a family, the nomination must be in favour of one or more members of the family, and a nomination made in favour of an outsider while a family exists is void. Where an employee acquires a family after making a nomination, the earlier nomination becomes void and a fresh one must be filed.

The practical consequence is stark. Where a valid nomination exists, the employer pays the nominee and the matter ends. Where it does not, the gratuity is payable to the legal heirs, and the employer, faced with competing claimants, will usually decline to pay anyone until a succession certificate or an order of the Controlling Authority resolves it. That process can take longer than the family can comfortably wait. If gratuity is payable to a minor, the amount is deposited with the Controlling Authority to be invested for the minor's benefit until majority.

Deadline warning: file the nomination, and refile it after marriage or the birth of a child. It takes one form and it is the difference between a payment made in weeks and a claim litigated for a year.

The Code on Social Security, 2020

The Payment of Gratuity Act is one of the statutes intended to be subsumed into the Code on Social Security, 2020. The Code has been passed and notified, but its provisions have been brought into force in stages and the gratuity chapter should not be assumed to have displaced the 1972 Act in your State unless you have checked the commencement position. The Code contemplates some changes of practical significance, including gratuity for fixed term employees on a pro rata basis without the five year requirement. Until the relevant provisions commence, the 1972 Act governs. I flag this because a good deal of online writing states the Code's position as though it were already the law everywhere. It is not, and advising a client on that basis is a mistake.

Five mistakes that cost employees their gratuity

1. Accepting the employer's arithmetic. The single most common error is the divisor. If your employer divided monthly wages by 30 instead of 26, your gratuity is roughly 13 per cent short. Recompute before you sign a full and final settlement.
2. Signing a full and final settlement without reserving the claim. A settlement that records receipt of all dues can be used against you. If the gratuity figure is disputed, record the dispute in writing at the time, not later.
3. Assuming resignation forfeits gratuity. It does not. Section 4(1) expressly covers resignation. Employers who suggest otherwise are simply wrong.
4. Not claiming on death or disablement. The five year rule is waived. Families routinely fail to claim because the employee was two or three years into the job.
5. Letting an allegation substitute for a forfeiture. An employer cannot withhold gratuity because an enquiry is pending or because it suspects misconduct. Forfeiture requires termination on a Section 4(6) ground, and the amount withheld must be proportionate.

Documents to keep, and to collect before you exit

• Appointment letter and every subsequent revision or promotion letter, since these establish the start date and the wage structure
• Salary slips for the last twelve months, and specifically the final month, to prove last drawn basic and dearness allowance
• Resignation letter with acknowledgement, or the termination or retirement letter
• Relieving letter and experience certificate showing the date of joining and the last working day
• The nomination form filed with the employer, and a copy for the family
• Any transfer letter where service moved between group entities
• The full and final settlement statement, with the gratuity computation shown separately
• If forfeiture is alleged: the charge sheet, the enquiry report and the termination order

A note from practice

Gratuity claims are, in my experience, the most winnable and least pursued of all employment claims. The reason is psychological rather than legal. An employee who has resigned wants the relieving letter, wants the reference, and wants to move on. The employer knows this, and a surprising number of gratuity refusals are not legal positions at all but simple bets that the employee will not bother. When the claim does get filed, the employer's defence very often collapses at the first document request, because there was no enquiry, or the termination was on a different ground entirely, or the computation used the wrong divisor and nobody expected it to be checked. I tell clients two things. First, work out your own figure before you accept theirs, because the arithmetic takes ten minutes and the difference is frequently a month's salary or more. Second, do not let the fear of a bad reference decide this for you. The Controlling Authority is not a hostile forum, the amount is a statutory debt rather than a favour, and the employer who withheld it knows that better than you do. The claims that fail are usually the ones brought years later on the strength of memory, without salary slips or a relieving letter. Keep the paper, and the claim keeps itself. Our employment and labour practice page sets out the wider set of workplace claims this sits alongside.

Glossary

• Continuous service: uninterrupted service, including protected absences such as authorised leave, layoff and maternity leave, as defined by Section 2A.
• Controlling Authority: the officer appointed by the appropriate Government to decide gratuity disputes under Section 7.
• Dearness allowance: a cost of living component of pay that forms part of "wages" for gratuity computation.
• Forfeiture: the statutory reduction or refusal of gratuity under Section 4(6), available only in defined circumstances.
• Moral turpitude: conduct that is inherently base or dishonest, judged by its character rather than by whether a criminal court has convicted.
• Nominee: the person named by the employee to receive gratuity on death, filed with the employer during service.
• Superannuation: attainment of the age fixed in the contract or rules for retirement.
• Wages: for this Act, basic wages plus dearness allowance, excluding bonus, commission, HRA and overtime.

Frequently Asked Questions (FAQ)

Is gratuity payable if I resign rather than retire? Yes. Section 4(1) covers termination on superannuation, retirement or resignation, as well as death or disablement. Resignation after five years of continuous service carries full entitlement.

Do I get gratuity if I worked only four years and eight months? Four years and 240 days in the fifth year has been held by the Madras High Court to qualify, and that reasoning is frequently relied on. It is not uniformly applied across the country and is not a Supreme Court holding, so treat it as a claim worth pressing rather than a certainty.

My employer divided my salary by 30. Is that correct? No, not for a monthly rated employee covered by the Act. Section 4(2) requires the monthly wages to be divided by 26. Using 30 understates your gratuity.

Does gratuity include HRA and my performance bonus? No. Wages for gratuity means basic plus dearness allowance. House rent allowance, bonus, commission and overtime are excluded.

Can my employer withhold gratuity because an enquiry is pending? Withholding requires termination on a ground listed in Section 4(6). A pending enquiry, or a suspicion, is not by itself a lawful basis to refuse payment.

Can gratuity be forfeited without a criminal conviction? Yes. In Western Coal Fields Ltd v Manohar Govinda Fulzele (2025), the Supreme Court held that Section 4(6) does not require a conviction, and that misconduct amounting to an offence involving moral turpitude, established in a fair departmental enquiry, can support forfeiture. The forfeiture must still be proportionate.

Can the entire gratuity be forfeited? Only where the statute and proportionality permit. In the 2025 ruling, full forfeiture was upheld where employment itself had been obtained by fraud, while in a fare misappropriation matter the forfeiture was confined to 25 per cent.

What if my employer simply does not respond? Apply to the Controlling Authority. The employer's duty to determine and pay under Section 7 does not depend on your application, and interest runs on delayed payment.

Is there a time limit to claim? An application is ordinarily to be made within thirty days of gratuity becoming payable, but a claim is not to be rejected merely for delay where sufficient cause is shown. Do not treat a missed date as the end of the matter.

Is gratuity taxable? For covered private sector employees the exemption under Section 10(10) of the Income-tax Act, 1961 is Rs 20 lakh, raised by notification in 2018. It is a lifetime cumulative limit across employers, and any excess is taxable as salary.

Can a creditor attach my gratuity? Section 13 protects gratuity payable under the Act from attachment in execution of any decree or order of a civil, revenue or criminal court.

If my company was sold, do I lose my earlier service? Not ordinarily. Where service is treated as continuous on a transfer of undertaking, past service carries over. The transfer documentation usually decides the point, so retain it.

This guide is general legal information for public awareness and is not legal advice. Gratuity disputes turn on the wage structure, the reason for termination and the documents on record. Please consult a qualified advocate about your specific matter.