Labour Laws
Gratuity under the Code on Social Security
Gratuity is a lump sum paid by the employer at the end of employment, in recognition of long service. Chapter V of the Code on Social Security replaces the Payment of Gratuity Act, 1972 and keeps its formula, with two significant changes: fixed term employees now qualify after one year, and gratuity is computed on the wider definition of wages with its 50% rule. This note covers eligibility, calculation, forfeiture, payment and the leading cases.
1. Eligibility, Section 53
Figure 1: When is gratuity payable?
- Coverage. Establishments with 10 or more employees under the First Schedule (Topic 19)
- Events. Gratuity is payable on superannuation, retirement, resignation, death, disablement due to accident or disease, and termination on expiry of fixed term employment.
- Continuous service, s.54. Service is continuous if uninterrupted, including interruptions by sickness, accident, leave, lay-off, lawful strike or lock-out. Otherwise, a year counts if the employee worked 240 days, or 190 days underground or in establishments working less than six days a week.
- Death. Gratuity goes to the nominee or, if none, to the heirs; nominations are made after one year of service (s.55)
2. Calculation and Payment
Figure 2: Computing gratuity
- New wage base. Gratuity is computed on wages as defined in s.2(88), including the 50% rule, for payments falling due from 21 November 2025, according to the Ministry's FAQs (Topic 3)
- Determination, s.56. The employer determines the amount on application and pays within 30 days; disputes go to the competent authority, and appeals lie within 60 days.
- Insurance, s.57. Every non-Government employer must insure its gratuity liability, unless it has an approved gratuity fund.
3. Forfeiture, Section 53(6)
- Damage or loss. Where services are terminated for an act, wilful omission or negligence causing damage to the employer's property, gratuity is forfeited to the extent of the loss.
- Misconduct. Gratuity may be forfeited wholly or partly if services are terminated for riotous or disorderly conduct or violence, or for an offence involving moral turpitude committed in the course of employment.
4. Leading Cases
Figure 3: Gratuity in the Supreme Court
⚠ Exam trap Five years for most employees, three for working journalists, one for fixed term employees (pro rata), none for death or disablement. Gratuity is 15 days' wages per completed year (monthly wages ÷ 26 × 15), 7 days per season in seasonal establishments, capped at ₹20 lakh. On forfeiture for moral turpitude, the 2025 decision in Western Coal Fields holds that a criminal conviction is not necessary, departing from Ajay Babu (2018). |
5. Frequently Asked Questions
How is gratuity calculated under the Social Security Code?
For every completed year of service, or part above six months, the employer pays fifteen days' wages at the rate last drawn. For a monthly-rated employee, fifteen days' wages are monthly wages divided by 26 and multiplied by 15. In seasonal establishments the rate is seven days' wages for each season. The total cannot exceed the notified ceiling, currently ₹20 lakh.
Can gratuity be forfeited without a criminal conviction?
In Union Bank of India v C.G. Ajay Babu (2018) the Supreme Court required the offence involving moral turpitude to be established in a court of law. In Western Coal Fields v Manohar Govinda Fulzele (2025) it held that a criminal conviction is not necessary, and that forfeiture may follow a finding in a fair departmental inquiry, with the extent depending on the gravity of the misconduct.
6. Related Topics
- Topic 17: Fixed Term Employment. Gratuity after one year.