Question 1

What is gratuity and who is eligible?

Accepted Answer

Gratuity is a statutory lump-sum payment made by an employer to an employee as a reward for long service, governed by the Payment of Gratuity Act, 1972. Any establishment with 10 or more employees is covered. Eligibility requires at least 5 years of continuous service with the same employer. Gratuity is also payable on death or permanent disability regardless of years served. Government employees, teachers, and those in organisations not covered by the Act may be eligible under separate rules - always check your appointment letter or HR policy.

Question 2

How is gratuity calculated?

Accepted Answer

The formula under the Payment of Gratuity Act is: Gratuity = (Basic + DA) × 15 × Years of Service / 26. Here, 15 represents 15 days of salary per completed year of service, and 26 represents the standard working days in a month (not 30). Years of service is rounded: if the last year includes more than 6 months, it counts as a full year. For example, 12 years 7 months becomes 13 years; 12 years 4 months stays 12 years. DA (Dearness Allowance) is included in the base but HRA, overtime, and other allowances are excluded.

Question 3

What is the 5-year rule and how does it work exactly?

Accepted Answer

The minimum continuous service required is 5 years. 'Continuous service' means uninterrupted employment - but lawful strikes, lockouts, and absence due to illness or accident do not break continuity. One exception: if an employee dies or suffers a total disability before completing 5 years, gratuity is still payable to the nominee or legal heir. The 5-year clock resets if you move to a new employer - gratuity entitlement is per employer, not total career tenure. Some companies voluntarily offer gratuity before 5 years as a retention benefit, but this is not legally required.

Question 4

Is gratuity taxable?

Accepted Answer

Tax treatment depends on your employer category. Government employees: gratuity is fully exempt from income tax with no upper limit. Private sector employees covered under the Payment of Gratuity Act: up to ₹20 lakh is tax-free; any amount above ₹20 lakh is taxable at your income slab rate. Private sector employees not covered by the Act: the exempt amount is the least of (a) actual gratuity received, (b) 15 days' salary per year of service (calculated using 30-day month, not 26), or (c) ₹20 lakh. Gratuity received by a nominee on the employee's death is fully tax-exempt in all cases.

Question 5

Can an employer forfeit or withhold gratuity?

Accepted Answer

Yes, under Section 4(6) of the Payment of Gratuity Act, an employer can forfeit gratuity wholly or partially in specific circumstances: (1) if the employee's services are terminated for acts of wilful omission or negligence causing damage or loss to the employer's property, gratuity can be forfeited to the extent of the damage, (2) if termination is for riotous, disorderly, or violent conduct, the entire gratuity can be forfeited. Simple poor performance or resignation does not forfeit gratuity. If you believe gratuity has been wrongfully withheld, file a complaint with the Controlling Authority (typically the Labour Commissioner) within 90 days.

Question 6

When must the employer pay gratuity and what if they delay?

Accepted Answer

The employer must pay gratuity within 30 days of it becoming payable (resignation, retirement, death, or disability). If the employer fails to pay within this period, they are liable to pay simple interest at the rate notified by the Central Government (currently 10% per annum) from the due date to the actual payment date. The employee or nominee must submit Form I (application for gratuity) to the employer. If the employer disputes the claim or does not respond within 30 days, the employee can approach the Controlling Authority. The limitation period for filing a claim is 60 days from when gratuity becomes payable.

Question 7

Is service in a contractual or probation period counted for gratuity?

Accepted Answer

Generally yes, if the employment is continuous and the employee is on the company payroll. A probation period counts as part of continuous service for gratuity purposes, provided the employee is eventually confirmed. If you are terminated during probation, the entitlement depends on total tenure - if it is 5 years including probation, gratuity is payable. For contractual employees, the answer is more complex: direct employees of the principal employer count their service from the start of the contract. Employees on the rolls of a contractor may have gratuity liability falling on either the contractor or the principal employer depending on the terms of the contract and labour laws applicable. Fixed-term contract employees with 5+ years of continuous service with the same organisation are also eligible under the Payment of Gratuity Act.

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