Payment of Gratuity Act, 1972 was enacted to provide a statutory terminal benefit to eligible employees for their continuous service. Gratuity is generally payable on termination of employment due to retirement, superannuation, resignation, death, or disablement, subject to the applicable legal conditions. Historically, the Act generally required five years of continuous service, with exceptions for death and disablement.
1. Objectives of Gratuity
The main objective of gratuity is to provide financial security to employees after termination of employment. It recognizes an employee’s contribution and continuous service to an organization. Gratuity may become payable on retirement, resignation, superannuation, death, disablement, or other circumstances specified under law. It acts as a terminal social-security benefit and helps employees meet financial requirements after leaving employment. The gratuity framework also promotes employee welfare, social justice, and stable employer-employee relationships. Under the current framework, these provisions are contained in the Code on Social Security, 2020, effective from 21 November 2025.
2. Applicability of Gratuity Provisions
The traditional Payment of Gratuity Act applied to specified establishments such as factories, mines, plantations, ports, railway companies, shops, and other establishments satisfying prescribed conditions, generally including establishments employing ten or more persons. The current gratuity provisions are contained in the Code on Social Security, 2020. The Code retains the framework for statutory gratuity while consolidating social-security legislation. Employers must therefore determine coverage according to the current Code and applicable rules rather than relying solely on the historical 1972 Act.
3. Eligibility for Gratuity
For ordinary employees, gratuity is generally payable after five years of continuous service, subject to the circumstances specified in the Code. However, five years’ service is not required where employment ends because of death or disablement, or in other specified circumstances. A significant current development concerns fixed-term employees. The Ministry’s 2026 FAQ clarifies that a fixed-term employee is eligible for gratuity when the employee renders service under the contract for one year from the start of the contract.
4. Calculation of Gratuity
Under the current framework, gratuity is generally calculated at 15 days’ wages for every completed year of service or part exceeding six months, based on the last drawn wages, subject to the statutory provisions. The Code’s definition of wages is important because it determines which components are included for calculation. The Ministry’s 2026 clarification states that payments not forming part of the components specified under Section 2(88) of the Code are not considered for gratuity calculation.
5. Payment of Gratuity
Under the current Code framework, the employer is responsible for paying gratuity when it becomes due. The Ministry’s 2026 employer compliance handbook states that the employer shall pay the amount of gratuity within 30 days from the date it becomes payable. Timely payment protects employees from unnecessary financial hardship and reduces disputes. Where payment is delayed, applicable statutory consequences may arise. Employers should therefore calculate the amount correctly, communicate the entitlement, and maintain appropriate records supporting the payment.
6. Gratuity for Fixed-Term Employees
One of the most important 2026 updates is the specific gratuity treatment of fixed-term employees (FTEs). The Ministry’s March 2026 FAQ clarifies that an FTE becomes eligible for gratuity after rendering service under the contract for one year from the start of the contract. The clarification also states that fixed-term employment refers to employees directly engaged by the employer; it does not automatically treat contract labour supplied through a contractor as fixed-term employment of the principal employer.
7. Gratuity for Contract Labour
The Ministry’s 2026 clarification specifically addresses gratuity liability for contract labour. Under Section 53 of the Code, where contract labour completes the required continuous service, the contractor, as the employer, is responsible for paying gratuity at the applicable rate. The Ministry has clarified that the contractor is responsible for gratuity after five years of continuous service, at 15 days’ wages for each completed year based on last drawn wages, subject to the Code and applicable conditions.
8. Nomination and Family Protection
Gratuity provisions provide protection to the employee’s family when an employee dies. Where gratuity becomes payable because of death, it is paid to the employee’s nominee or heirs, according to the applicable provisions. Nomination helps simplify the settlement process and ensures that eligible beneficiaries can receive the amount due. Where a nominee or heir is a minor, the law provides mechanisms for protecting the minor’s share. This makes gratuity an important family-oriented social-security benefit.
9. Forfeiture of Gratuity
Gratuity is a protected statutory benefit, but it may be wholly or partially forfeited in specified circumstances under the applicable law. Forfeiture is associated with legally recognized grounds, such as certain misconduct causing damage or loss to the employer’s property or specified serious misconduct. An employer cannot arbitrarily withhold gratuity merely because an employee has left employment. The statutory conditions and applicable procedural requirements must be satisfied before forfeiture can be imposed. This protects employees against unjustified denial of their terminal benefits.
