Gratuity: when it is payable, continuous service and forfeiture

1. Nature and application

Gratuity began as a voluntary reward for long service and became a statutory right with the 1972 Act. It is now a retiral benefit earned by service, not a bounty: once the conditions are met the employer must pay. Under the First Schedule Chapter V applies to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment in which ten or more employees are or were employed on any day of the preceding twelve months, and to others notified [PG Act s.1(3)]. Once covered, it stays covered (s.1(8)).

“Employee” is the general definition in s.2(26), with no wage limit, but Explanation 1 to s.53 excludes a holder of a civil post under the Central or a State Government who is governed by other gratuity rules. Teachers were held not to be “employees” under the old definition in Ahmedabad Pvt. Primary Teachers' Association v. Administrative Officer, 2004 INSC 32, (2004) 1 SCC 755. Parliament amended the 1972 Act in 2009, with effect from 3 April 1997, to cover them, and the amendment was upheld in Independent Schools' Association Chandigarh v. Union of India, 2022 INSC 1303. The Code's wide definition of employee continues the coverage.

2. When gratuity is payable: section 53(1) [PG Act s.4(1)]

On termination of employment, after continuous service of not less than five years:

• (a) on superannuation — reaching the age fixed in the contract or service conditions (s.2(82));
• (b) on retirement or resignation — “retirement” means termination of service otherwise than on superannuation (s.2(70)), so it includes discharge, dismissal and retrenchment;
• (c) on death or disablement due to accident or disease;
• (d) on termination of the contract period under fixed term employment;
• (e) on any other event notified by the Central Government.

Exceptions to the five-year rule:

• a working journalist needs only three years (first proviso);
• no minimum at all where termination is due to death, disablement, expiry of fixed term employment or a notified event (second proviso). A fixed term employee is paid pro rata (third proviso to s.53(2)), in line with s.2(34)(b), which entitles him to all benefits of a permanent employee proportionately even if his term is shorter than the qualifying period.

“Disablement” here means disablement that incapacitates the employee for the work he was capable of before the accident or disease (Explanation 2). On death the gratuity goes to the nominee, or if there is none, to the heirs; a minor's share is deposited with the competent authority and invested until majority (third proviso to s.53(1)).

3. Continuous service: section 54 [PG Act s.2A]

Actual continuity (clause A). Uninterrupted service, including service interrupted by sickness, accident, leave, absence without leave (unless an order treating it as a break in service has been passed under the standing orders or rules), lay-off, strike, lock-out or cessation of work not due to the employee's fault.

Deemed continuity (clause B). An employee who is not in continuous service under clause A for a year or six months is deemed to be, if in the preceding twelve (or six) calendar months he actually worked for at least:

• 240 days in a year (190 below ground in a mine or in an establishment working less than six days a week);
• 120 days in six months (95 for the same classes).

Days of authorised lay-off, leave with full wages earned in the previous year, absence due to temporary disablement from an employment accident, and maternity leave up to twenty-six weeks count as days actually worked (Explanation).

Seasonal establishments (clause C). An employee who worked at least 75 per cent of the days on which the establishment was in operation is deemed in continuous service; gratuity is seven days' wages for each season (second proviso to s.53(2)).

The deeming clause was added after Lalappa Lingappa v. Laxmi Vishnu Textile Mills, 1981 INSC 30, (1981) 2 SCC 238, where the Court read “actually employed” under the old section 2(c) strictly, as days of actual work, excluding Sundays and paid holidays. Parliament responded with section 2A in 1984 and the Explanation listing days that are to be counted.

4. Forfeiture: section 53(6) [PG Act s.4(6)]

Notwithstanding the right in s.53(1):

• (a) where the employee's services are terminated for any act, wilful omission or negligence causing damage or loss to, or destruction of, the employer's property, gratuity is forfeited to the extent of the damage or loss so caused;
• (b) gratuity may be wholly or partially forfeited if the services are terminated (i) for riotous or disorderly conduct or any other act of violence, or (ii) for any act which constitutes an offence involving moral turpitude, committed in the course of employment.

Three conditions follow from the text. The services must have been terminated for the misconduct; forfeiture under (a) is limited to the loss actually caused, which must be quantified; and under (b)(ii) the act must amount to an offence involving moral turpitude.

• Union Bank of India v. C.G. Ajay Babu, 2018 INSC 708, (2018) 9 SCC 529 — a bank employee was dismissed for misconduct and his gratuity forfeited. The Court held that under s.4(6)(b)(ii) it is not enough that the misconduct is serious; it must constitute an offence involving moral turpitude. A criminal conviction is not essential, but the employer must establish that the act is such an offence. A bipartite settlement or service rule cannot widen the statutory grounds. The forfeiture failed.
• Jaswant Singh Gill v. Bharat Coking Coal Ltd., 2006 INSC 821, (2007) 1 SCC 663 — gratuity cannot be withheld or forfeited after superannuation by continuing disciplinary proceedings under the company's rules; the statute prevails over the rules, and forfeiture is possible only on termination for the causes in s.4(6).

Better terms in an award, agreement or contract are preserved (s.53(5)) [s.4(5)], but worse terms cannot cut down the statutory right.

5. Problems

(a) A joined an industry and was terminated for misconduct within three years. Is he eligible for gratuity? (January 2026)

Issue. Whether an employee dismissed before five years' service can claim gratuity.

Law. Section 53(1) requires five years' continuous service; dismissal is “retirement” under s.2(70) and so an event under s.53(1)(b), but the second proviso waives the five years only for death, disablement, expiry of a fixed term and notified events.

Application. A's termination is for misconduct, not one of the excepted events, and he has less than three years' service. Unless he was on a fixed term contract (in which case the pro rata rule would apply on its expiry, not on dismissal), he has not earned gratuity. The question of forfeiture does not arise because no gratuity has become payable.

Conclusion. A is not eligible.

(b) An employer refuses to pay gratuity to a workman with twelve years' service because his negligence caused great loss. Can he recover it? (January 2026)

Issue. Whether gratuity can be withheld wholly for negligent loss.

Law. Section 53(6)(a): forfeiture only where services were terminated for the negligent act, and only to the extent of the loss so caused; Jaswant Singh Gill; Ajay Babu.

Application. If the workman was not terminated for the negligence (for example, he retired or resigned), there is no forfeiture at all. If he was terminated for it, the employer must quantify the loss and may deduct only that amount, after notice to the employee. A blanket refusal is unlawful.

Conclusion. He can recover the gratuity, or the balance after deduction of the proved loss, by applying to the competent authority under s.56(5), with interest for delay under s.56(4).

How this is examined

Gratuity problems on forfeiture have appeared in both January 2026 papers; August 2024 asked “define gratuity; what are the conditions for payment and how is it calculated”. Learn the five events of s.53(1), the exceptions to five years, the two limbs of s.53(6), and 240/190 and 120/95 days. In a problem, check in this order: is the establishment covered, is he an employee, five years or an exception, then forfeiture.