The Payment of Gratuity Act, 1972 applies to establishments employing ten or more persons. Once applicable, coverage generally continues even if employee strength later falls below ten.

Some important principles continue to be misunderstood in practice.

Who Is Eligible

  • Employees completing five years of continuous service are entitled to gratuity on retirement, resignation, superannuation, or termination.
  • The five-year condition does not apply in cases of death or disablement.
  • Under Section 2A, continuous service is determined by statutory service conditions and judicial interpretation. Courts in certain cases have recognised gratuity eligibility where an employee completed four years and 240 days of service, making this an area employers should examine carefully before rejecting claims.

How Gratuity Is Calculated

  • Gratuity = (Last drawn salary x 15 x Years of service) / 26.
  • Salary includes basic pay and dearness allowance.
  • HRA, bonus, commission, and most other CTC components are excluded.
  • Service exceeding six months in the final year is rounded up for calculation purposes.

Payment Timeline and Ceiling

  • The present statutory ceiling is Rs 20 lakh.
  • Payment is generally required within 30 days of gratuity becoming due.
  • Delayed payment may attract interest under the Act.

Forfeiture Under Section 4(6)

Gratuity is not automatically forfeitable upon termination. The Act permits forfeiture only in specific circumstances involving loss or damage caused to the employer, riotous or disorderly conduct, or offences involving moral turpitude, subject to statutory conditions.

Tax Treatment

  • For employees covered under the Act, gratuity exemption is available under Section 10(10) subject to prescribed limits.
  • Amounts exceeding applicable limits may become taxable.

The Practical Impact

Gratuity liability begins accumulating from the first year of service. Employers that have not reviewed provisioning, payroll assumptions, or gratuity policies may be carrying understated liabilities or compliance gaps. The issue is not merely HR administration; it directly affects payroll, taxation, and financial reporting.