Gratuity is an important social security benefit that rewards employees for long and continuous service. The Code on Social Security, 2020 (“Code”) consolidates and modernises gratuity laws, expanding coverage to evolving employment forms such as fixed-term employment and clarifying rules on eligibility, computation, and payment. It reflects a shift towards a more structured and inclusive framework aimed at protecting employees at the end of their service.

When is gratuity payable to an employee?

Gratuity is payable to an employee on termination of employment after rendering continuous service of not less than five years in the following cases:

On retirement or resignation;

On death or disablement due to accident or disease;

On termination of fixed-term employment;

On occurrence of any event notified by the Central Government.

For working journalists, the requirement of five years is reduced to three years.

The condition of five years’ service is not required in cases of death, disablement, expiry of fixed-term employment, or notified events.

In case of death, gratuity is paid to the nominee or heirs. If the nominee/heir is a minor, the amount is deposited with the competent authority for investment until majority.

How is gratuity calculated?

Gratuity is calculated at the rate of fifteen days’ wages for every completed year of service or part thereof exceeding six months, based on the last drawn wages.

For piece-rated employees: average wages of last three months (excluding overtime).

For seasonal employees: seven days’ wages per season.

For fixed-term employees or deceased employees: payable on a pro rata basis.

Is there a maximum limit on gratuity?

Yes, gratuity shall not exceed the amount notified by the Central Government.

How is gratuity calculated for an employee working on reduced wages after disablement?

For the period before disablement: wages as originally received.

For the period after disablement: reduced wages are considered.

Can an employee receive better gratuity terms than those provided here?

Yes, an employee is entitled to better gratuity terms under any award, agreement, or contract.

Can gratuity be forfeited?

Yes, gratuity may be forfeited in the following situations:

To the extent of damage or loss caused to the employer due to wilful acts or negligence.

Partially or wholly if terminated for riotous or disorderly conduct or violence or an offence involving moral turpitude committed during employment.

Who is excluded from the definition of employee for gratuity purposes?

Persons holding posts under the Central or State Government governed by separate gratuity laws or rules are excluded.

What is meant by “disablement”?

Disablement means incapacity to perform work previously performed due to accident or disease.

How are fifteen days’ wages calculated for monthly employees?

By dividing monthly wages by 26 and multiplying by 15.

What principles govern denial or forfeiture of gratuity?

Misconduct alone is insufficient; termination must be for such misconduct.

For moral turpitude, conviction by a competent court is necessary.

Better contractual terms override statutory minimum.

Gratuity cannot be forfeited for absenteeism unless loss is caused.

What is continuous service?

Continuous service means uninterrupted service, including interruptions due to sickness, accident, leave, lay-off, strike, lockout, or cessation of work not due to employee fault.

When is an employee deemed to be in continuous service?

If not in uninterrupted service for one year: 190 days (mines or establishments working less than 6 days/week), or 240 days (other cases). For six months: 95 days (mines or less than 6-day establishments), or 120 days (other cases).

Which days count as “actually worked”?

Leave with full wages;

Absence due to employment-related injury;

Maternity leave (up to 26 weeks).

What about seasonal employees?

They are deemed in continuous service if they worked at least 75% of operating days.

What is the judicial view on gratuity as a right?

Gratuity is a statutory right and cannot be denied on technical grounds.

When must an employee make a nomination?

After completing one year of service.

Can gratuity be distributed among multiple nominees?

Who can be nominated if the employee has a family?

Only family members; otherwise, nomination is void.

What if the employee has no family?

Nomination can be made to any person, but becomes invalid upon acquiring a family, requiring a fresh nomination.

Can nomination be modified?

Yes, anytime with written notice.

What happens if a nominee dies before the employee?

The share reverts to the employee, who must make a fresh nomination.

Where is the nomination kept?

With the employer in safe custody.

How is gratuity claimed?

By submitting a written application by the employee or authorised person.

Is the employer required to act even without application?

Yes, the employer must determine and notify the gratuity amount.

When must gratuity be paid?

Within 30 days from the date it becomes payable.

What if gratuity is delayed?

Simple interest is payable unless delay is due to employee fault and approved by authority.

What happens in case of disputes?

Employer deposits admitted amount.

Parties may approach the competent authority.

Authority conducts inquiry and decides entitlement.

Deposited amount is disbursed accordingly.

What powers does the competent authority have?

Powers of a civil court, including summoning witnesses; requiring documents; receiving affidavits and issuing commissions.

Is the inquiry judicial in nature?

Can orders be appealed?

Yes, within 60 days (extendable by another 60 days for sufficient cause). Employer appeals require deposit of gratuity amount.

What can the appellate authority do?

Confirm, modify, or reverse the decision.

What is the legal position on timely payment and interest?

Payment of gratuity is a statutory duty.

Delay attracts interest.

Gratuity is a valuable right, not a bounty.

Failure of employer removes limitation defence.

Are employers required to insure gratuity liability?

Yes, except government establishments.

Can employers be exempted?

Yes, if they have an approved gratuity fund or employ 500+ persons with such fund.

Is registration required?

Yes, and only after obtaining insurance or establishing a fund.

What happens if employer defaults in premium or contribution?

Employer must pay gratuity (with interest) immediately.

What is an approved gratuity fund?

It has the meaning assigned under the Income Tax law.

Who appoints the competent authority?

The appropriate Government.

Can multiple authorities be appointed?

Yes, with distribution of work regulated by the Government.

Can experts assist the authority?

Yes, persons with special knowledge may assist in inquiries.

Therefore, the gratuity provisions under the Code strengthen employee welfare by widening eligibility and improving clarity and enforcement. While the framework is progressive, its effectiveness depends on proper implementation and compliance. Ultimately, gratuity remains a statutory right that plays an important role in ensuring financial security for employees.

Muneeb Rashid Malik is an Advocate. He tweets @muneebmalikrash.

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