What is Gratuity?

Gratuity is a statutory retirement benefit paid by an employer to an employee for long and continuous service.

It is governed by the Payment of Gratuity Act, 1972 and now also covered under the Code on Social Security, 2020.

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Eligibility Under Existing Law

General Rule:

An employee must complete 5 years of continuous service to be eligible.

Exception:

The 5-year rule does not apply in case of:

• Death

• Permanent disability

4 Years + 240 Days Rule:

Courts have interpreted that employees completing 4 years and 240 days in the fifth year may qualify under continuous service provisions.

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🔴 Important Update: Gratuity for Fixed-Term Employees (New Labour Code Provision)

Under the Code on Social Security, 2020, a major change has been introduced:

👉 Fixed-Term Employees are eligible for gratuity even if they do not complete 5 years of service.

What This Means:

If an employee is hired on a fixed-term contract
And completes the contract period
Gratuity must be paid on a pro-rata basis

✔ No 5-year condition applies to fixed-term employees
✔ Gratuity is calculated proportionately based on service duration
✔ No separate 1-year minimum eligibility condition is prescribed

This is a significant employee-friendly reform under the new labour codes.

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Gratuity Formula

Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26

Where:

• Salary = Basic + DA

• Service above 6 months is rounded up to the next full year

For fixed-term employees, the same formula applies but calculated proportionately.

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When Can Employer Deny Gratuity?

Gratuity can only be forfeited in cases such as:

• Proven fraud

• Moral turpitude

• Violent or riotous conduct

• Damage to company property

Resignation alone is NOT a valid ground for denial.

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What to Do If Employer Denies Gratuity?

Step 1: Send Written Application

Request gratuity formally from HR.

Step 2: Send Legal Notice

If no response is received.

Step 3: File Complaint

Approach:

• Labour Department

• Controlling Authority under the Gratuity Law

The authority can order:

✔ Payment of gratuity
✔ Interest on delayed payment

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Interest Rule

If gratuity is not paid within 30 days, the employer must pay interest unless the delay is due to the employee’s fault.

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📊 Gratuity Eligibility Comparison – Regular vs Fixed-Term Employees

Criteria	Regular Employee	Fixed-Term Employee
Governing Law	Payment of Gratuity Act, 1972	Code on Social Security, 2020
Minimum Service Required	5 Years (General Rule)	No 5-Year Condition
4 Years + 240 Days Benefit	May Apply (as per court interpretations)	Not Required
Eligibility Basis	Continuous Service	Completion of Fixed Contract Period
Calculation	Standard Gratuity Formula	Pro-rata Basis

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🔎 Key Takeaway

✔ Regular employees → 5-year rule generally applies
✔ Fixed-term employees → Eligible upon completion of contract period
✔ Gratuity is a statutory right, not employer discretion