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Payment of Gratuity to Employees

A company is required to pay a lump sum known as the gratuity to the employee who leaves the organisation under certain circumstances. It is a retirement benefit paid to an employee in recognition to their service in the company.
Written by:
Swati Shalini
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A company is required to pay a lump sum known as a gratuity to the employee who leaves the organization under certain circumstances. It is a retirement benefit paid to an employee in recognition of their service in the company. It is an important component of salary, paid to employees who have completed at least five years of continuous service in a company.  The amount paid is based on the duration for which the employee has worked in the organization, paid upon retirement, termination, resignation or employee’s death. However, the criteria of 5 years of completion of services have to be fulfilled for an employee to get the benefits of gratuity. 

In India, the Payment of Gratuity Act, 1972 is applicable to employees working in factories, mines, oilfields, plantations, railway companies, shops and other establishments that have employed 10 or more employees. Gratuity is fully paid by the employer and no amount can be deducted in name od gratuity from an employee’s salary. The Act lays down the condition of 5 years’ continuous services to become eligible for getting the benefits of gratuity. However, the Act also provides that if the employee passes away or is rendered disabled due to an accident or illness, gratuity has to be paid even if the 5 years period has not to be completed. In case of death, gratuity is paid to the nominee appointed by the employee. Under the Gratuity Act, an employee becomes eligible for gratuity in the following cases:  When the employee becomes eligible for superannuation. When the employee retires. When the employee resigns. When the employee dies or suffers from disability due to an accident or illness.

How is Gratuity Calculated? 

Gratuity = Salary × Duration of Service x 15/ 26

Here, Salary connotes the Basic Salary + Dearness Allowance; Duration of Service is the number of years for which the employee has worked in the company; 15/ 26 is the ratio of 15 days out of 26 days of working days in a month.  Gratuity received under the Act is exempted from taxation to the extent that it is not more than 15 days’ salary for the duration of service calculated on employee’s salary. The Gratuity Amendment Act, 2017 has increased the threshold of the maximum tax-free gratuity from Rs. 10 lakhs to Rs. 20 lakhs.  The amount has to be paid in cash, by demand draft or bank cheque to the employee or the nominee. The employer is liable to pay the entire amount of gratuity within 30 days from the date it is active, i.e. the date on which the employee retires resigns, terminated, dies or is rendered disabled.  If the employee fails to pay the amount of gratuity within the stipulated time period, the employee becomes liable to pay simple interest at the rate decided by the Central Government,  on the amount from the date it has become due. However, gratuity payable to an employee can get forfeited if:  The employee has been terminated for lawless, disorderly conduct or any other act of violence. The employee is terminated for any act which is considered as a crime or violation of the terms of employment. If gratuity is not paid by the employer within the stipulated time, the employee has the right to file a complaint with the Controlling Authority under the Gratuity Act within the area where the company is located or where the employee was working at the time of termination. The employee can also file a complaint in the Labour Court against the employer for non-payment of gratuity.  Want to file a complaint against the employer? Hire the best employment lawyer from Myadvo in your city. Email us at or call now at 9811782573.