Employees play a major role in growth of any organization. Payment of gratuity by an employer is a mechanism devised to recognize the efforts of employees who remain associated with the organizations for a long period of time and also, serves as an instrument of social security to such employees in the event of termination, resignation, retirement, superannuation, death. GRATUITY is a defined benefit plan given by the employer to the employee for rendering services continuously for five years or more. It is a monetary benefit usually given at the time of retirement. But there are certain rules that make an employee eligible to receive gratuity before the age of retirement or superannuation.
The Act by recognizing the right of an employee to claim gratuity, leaves no discretion with an employer to make payment of gratuity dues to an employee at his own sweet will, which has to be mandatorily paid, provided the Act is applicable on the concerned employer.
In India, gratuity rules and requirements are set out under the Payment of Gratuity Act, 1972. An employer may also choose to pay gratuity outside of that which is required by this Act. The Payment Of Gratuity (Amendment)Act,2018 enables the government to raise the limit of tax-free gratuity. The change can be made through an executive order by the prime minister

Eligibility To Get Gratuity
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year). If you have completed minimum 240 days in the fifth year of your full time of your service then you are eligible or else you are not. According to the Payment Of Gratuity Act 1972, an employee is eligible to receive gratuity if he has rendered continuous service for at least five years with an organisation. This gratuity is payable to the employee:
a) On his superannuation, or
b) On his retirement or resignation.

However, there is an exception where the condition of working continuously for five years with an organisation is not applicable. If an employee’s services are terminated due to his death or has become disabled due to an accident or a disease, an employer is mandated by law to pay gratuity to him or his nominee/legal heir, as the case maybe, irrespective of the number of years of continuous service.

Any other gratuity is exempt to the extent that it does not exceed one half-month salary for each year of completed service calculated on the basis of average salary for 10 immediately preceding months. The upper limit of US$41,856 applies to the aggregate of gratuity received from one or more employers in the same or different years.
Payment. The employer shall arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated.
If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate not exceeding the rate stipulated by the federal government.
Gratuity should be paid in cash, or if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.


Employee’s Right To Gratuity

The Act by recognizing the right of an employee to claim gratuity, leaves no discretion with an employer to make payment of gratuity dues to an employee at his own sweet will, which has to be mandatorily paid, provided the Act is applicable on the concerned employer. Any failure to make payment of gratuity dues, is punishable with imprisonment for not less than six (6) month and which may further be extended to two (2) years.


Continuous Service

According to Section 4 (1) of the Act, gratuity is payable to an employee on the termination of his employment after he has rendered continuous service for not less than five (5) years on his superannuation or on his retirement or resignation or on his death or disablement due to accident or disease. Section 2-A (1) of Act defines the term ‘continuous service’. The courts in India have time and again observed that the definition of ‘continuous service’ has to be interpreted liberally.


Payment of Gratuity in cases of mergers and transfers

In the era of cross border mergers and transfers, one of the biggest confusion faced by transferee entities is towards the payment of gratuity to its employees who have completed five (5) years of service with the transferor entity or the merged entity.An employer cannot deprive his employees of the benefits that have accrued to them by reason of past services merely by transferring his business to another person or to another limited company;

Employer’s Right To Forfeiture

Section 4 (6) of the Act permits an employer to forfeit gratuity payable to an employee in the certain circumstances. As per the said provision:

  1. The gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer’ shall be forfeited to the extent of the damage or loss so caused;
  2. The gratuity payable to an employee may be wholly or partially forfeited (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.


Judicial Approach towards forfeiture

Time and again the judiciary has observed that the withholding / forfeiture of gratuity should be strictly within the prescribed limits of Section 4 (6) of the Act. Supreme Court of India, observed that gratuity is a tool of social welfare to provide economic security in the fall of life when the aging process effects the physical and mental capacity and one falls, back on savings.  Such payment cannot be withheld unless specifically permitted by any statutory provision.


1. In Bombay Gas Public Limited Co. v. Papa Akbar and another[1], 1990, Mh.L.J. 50. Smt. Sujata Manohar, J., (as she then was) considered the provisions of the Payment of Gratuity Act, 1972 and the 1972 Rules framed there under and held that the provisions of section 4(6) of the Gratuity Act dealing with the employer’s right to forfeit the amount of gratuity can come into play only when there is termination of the services or any act, wilful omission or negligence causing any damage or loss to or destruction of the property belonging to the employer. It was held that the provisions dealing with forfeiture of the right to receive the gratuity had to be construed strictly. In the absence of the conditions stipulated in section 4(6) being satisfied, the termination of an employee simplicitor does not result in forfeiture of his right to receive gratuity.

2. Ramjilal Chimanlal Sharma v. M/s. Elphinstone Spinning[2] and Weaving Mill Co. Ltd. and another, 1984, Lab. I.C. 1703, this Court was called upon to consider the question as to whether the right to receive the amount of gratuity under the Payment of Gratuity Act, 1972 can be circumscribed or made dependent upon the conduct of the employee subsequent to the date of his retirement, as is the case before me. In that case, the petitioner Ramjilal had retired from the employment of the respondent Mill. He was claiming his gratuity. However, there was a dispute in relation to the room in his occupation and the employer was declining to pay the amount of gratuity unless the room was vacated. In para 5 of the judgment, at page 1705, this Court considered the question and held that the right to receive the amount of gratuity could not be circumscribed or made dependent upon the conduct of the employee subsequent to the date of his retirement. The right to receive gratuitycannot be defeated or cannot be used as a lever by the employer for securing back possession of the premises from the employee. It is true that in Ramjilal’s case the petitioner gave an undertaking to the Court that he will vacate the premises and hand over the possession of the premises to the employer within three months from the date of receipt of the gratuity. The fact, however, remains that this Court-Pendse, J. (as he then was) held that the right cannot be defeated.

1. m.economictimes.com
2. india-breifing.com

3. indiankanoon.org

[1] (. (1989) 91 BOMLR 895)

[2] ((1990) IILLJ 220 Bom)

Image Source



Mr. Elwin Thomas

Legal Intern @ Prerna Foundation