Gratuity Act: Calculation Formula, Eligibility & Disputes (2026)
Your client worked at a company for 4 years and 8 months. They were terminated. The company says: "You need 5 years — you get nothing." The client asks: is 4 years 8 months really not enough?
The answer depends on which Supreme Court ruling the company is ignoring. Surya India Pvt. Ltd. v. Superintendent of ESI and subsequent HC rulings have held that 4 years and 240 days of continuous service counts as 5 years for gratuity eligibility. The company owes your client their gratuity.
The Payment of Gratuity Act, 1972 is one of India's most important employment welfare legislations — yet gratuity disputes remain common because employers either miscalculate or wrongly deny. NyayaVeda AI provides instant citation-verified research on gratuity calculation disputes, forfeiture precedents, and Controlling Authority orders.
What Is Gratuity under Section 4 of the Payment of Gratuity Act?
Gratuity under Section 4 of the Payment of Gratuity Act, 1972 is a statutory retirement benefit payable to any employee who has completed five years of continuous service, calculated at 15 days' last drawn wages for each completed year of service, subject to a maximum of Rs 20 lakhs, with the formula being last drawn salary multiplied by 15/26 multiplied by years of service.
Who Is Eligible?
The 5-Year Rule (Section 4)
| Requirement | Detail |
|---|---|
| Minimum service | 5 years of continuous service |
| Exception | Death or disablement — no minimum service required |
| "Continuous service" | 240 days worked in a year = 1 year of continuous service |
| 4 years + 240 days | Several HC rulings count this as 5 years (employee-friendly interpretation) |
Which Establishments Are Covered?
| Covered | NOT Covered |
|---|---|
| Factories, mines, oilfields, ports, railways | Establishments with < 10 employees (unless previously covered) |
| Shops and establishments with 10+ employees | Central/State government employees (covered by CCS/State rules instead) |
| Educational institutions, hospitals, NGOs with 10+ employees | Military personnel |
The Gratuity Formula
For Employees Covered Under the Act
Gratuity = Last drawn salary × 15/26 × Number of years of service
| Component | Detail |
|---|---|
| Last drawn salary | Basic pay + DA (dearness allowance) |
| 15/26 | 15 days' salary for every completed year (26 working days assumed per month) |
| Years of service | Completed years (fraction > 6 months = next full year) |
Worked Example
| Component | Value |
|---|---|
| Last basic + DA | Rs 50,000/month |
| Daily rate | Rs 50,000 ÷ 26 = Rs 1,923 |
| 15 days' wages | Rs 1,923 × 15 = Rs 28,845 |
| Years of service | 12 years |
| Gratuity | Rs 28,845 × 12 = Rs 3,46,140 |
Maximum Limit
| Period | Maximum Gratuity |
|---|---|
| Before March 2018 | Rs 10 lakhs |
| March 2018 onwards | Rs 20 lakhs |
| Expected revision | Rs 25 lakhs (proposed — not yet notified) |
If calculated gratuity exceeds the maximum: The employee receives the maximum cap amount — not the calculated amount.
When Gratuity Can Be Forfeited (Section 4(6))
An employer can FORFEIT gratuity only in TWO situations:
| Ground | Extent of Forfeiture |
|---|---|
| Terminated for moral turpitude — convicted of an offence involving moral turpitude during employment | Full forfeiture |
| Terminated for riotous/disorderly conduct or violence — act of violence causing damage to employer's property | Forfeiture to the extent of damage |
What Is NOT a Valid Ground for Forfeiture
| Employer's Excuse | Legal Position |
|---|---|
| "Employee resigned without notice period" | ❌ NOT a ground — gratuity cannot be denied |
| "Employee did not serve notice" | ❌ Notice period deduction from salary is separate — gratuity is still payable |
| "Employee was terminated for poor performance" | ❌ Performance ≠ moral turpitude — gratuity is payable |
| "Employee joined a competitor" | ❌ Non-compete is a civil matter — gratuity cannot be withheld |
| "Employee was absent without leave" | ❌ Unauthorized absence is not moral turpitude |
Dispute Resolution: Filing a Claim
Step 1: Apply to Employer (Form I)
File a written application to the employer within 30 days of gratuity becoming payable (termination/retirement/resignation). The employer must pay within 30 days of receiving the application.
Step 2: If Employer Refuses — Controlling Authority
| Forum | Detail |
|---|---|
| Who | Controlling Authority (usually Assistant Labour Commissioner) |
| Where | Labour Commissioner's office having jurisdiction over the establishment |
| Form | Form N (application for direction) |
| Timeline | Controlling Authority must decide within reasonable time — typically 3-6 months |
| Appeal | To Appellate Authority (within 60 days) → High Court (writ) |
Interest on Delayed Payment
If the employer does not pay within 30 days:
- Simple interest at the rate notified by the government (currently 10% p.a.)
- Interest runs from the date gratuity became payable until actual payment
- The Controlling Authority can direct payment of interest in addition to the gratuity amount
Tax Treatment
| Component | Tax Status |
|---|---|
| Gratuity received on retirement/death | Exempt up to Rs 20 lakhs (Section 10(10) IT Act) |
| Gratuity for government employees | Fully exempt (no cap) |
| Gratuity exceeding Rs 20 lakhs | Excess is taxable as salary income |
Landmark Judgments
| Case | Year | Ratio | When to Cite |
|---|---|---|---|
| Mettur Beardsell v. Workmen | 2006 SC | 240 days in a year = continuous service for gratuity eligibility | 4 years + 240 days = eligible |
| Surendra Nagar District Panchayat v. Dahyabhai | 1997 SC | Gratuity is a statutory right — cannot be denied on contractual grounds | When employer claims "contract says no gratuity" |
| Delhi Cloth & General Mills v. Shambhu Nath | 1978 SC | Termination for misconduct that does not involve moral turpitude — gratuity payable | Performance/misconduct termination |
Frequently Asked Questions
Is gratuity payable if an employee resigns?
Yes — if the employee has completed 5 years of continuous service (or 4 years + 240 days). Resignation does not forfeit gratuity. The employer must pay within 30 days of the last working day.
Can an employer deduct notice period pay from gratuity?
No — gratuity is a separate statutory entitlement. The employer can deduct notice period pay from the employee's final salary — but not from gratuity. These are distinct obligations.
Is gratuity applicable to contract employees?
Yes — if the contract employee has worked for 5+ years continuously at the same establishment, regardless of the contractual arrangement. The Act looks at continuous service, not the nature of employment contract.
What if the employer goes bankrupt?
Gratuity is a preferential debt under the Insolvency and Bankruptcy Code. In liquidation, employee dues (including gratuity) rank above unsecured creditors. The employee can file a claim with the Insolvency Resolution Professional. Verify this analysis using NyayaVeda AI's source-verified research platform.
Quick Reference Card
⚖️ GRATUITY — QUICK REFERENCE
FORMULA: Last salary × 15/26 × Years of service ELIGIBILITY: 5 years continuous service (240 days = 1 year) MAXIMUM: Rs 20 lakhs (proposed: Rs 25 lakhs) PAYMENT DEADLINE: 30 days from application INTEREST ON DELAY: 10% p.a. FORFEITURE: ONLY for moral turpitude conviction or violence TAX EXEMPT: Up to Rs 20 lakhs (Sec 10(10) IT Act) DISPUTE FORUM: Controlling Authority (Labour Commissioner)
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Disclaimer: This article is for informational and educational purposes only. It does not constitute legal advice.
Last Updated: August 2026 | Author: NyayaVeda Legal Research Team
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Disclaimer: This article is for informational and educational purposes only. It does not constitute legal advice. For specific legal matters, consult a qualified advocate registered with the Bar Council of India. NyayaVeda AI is an AI-powered research tool, not a law firm, and does not establish any advocate-client relationship.