Eligibility Criteria of Gratuity

► Date : Jun 01, 2022


Gratuity is a statutory right of an Employee whoever completes 5 years in the same Organization

as Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees. Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him. gratuity is a statutory obligation on the shoulders of the employer to make the payment of Gratuity to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

Provisions of Gratuity - Refer Section 4 (1) of The Payment of Gratuity Act 1972 (a)

(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, –

a. on his superannuation, or

b. on his retirement or resignation, or

c. on his death or disablement due to accident or disease:

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.]

Explanation.: For the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he, was capable of performing before the accident or disease resulting in such disablement.

Determination of Gratuity Amount - Refer Section 4 (2) of The Payment of Gratuity Act 1972 (a)

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages or such number of days as may be notified by the Central Government, based on the rate of wages last drawn by the employee concerned:

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season:

(Wages of the employee at the time of exit) x (7/26) x (Number of Years of Service at the time of exit)

Applicability of Payment of Gratuity Act

Application depends on two criteria. 

1. he should be employed in an establishment to which the act applies and

2.he is an employee as defined in section 2 (e)

Establishments to which the Payment of Gratuity Act applies: Section 1(3) applies to

1. Employees engaged in factories, mines, oilfields, plantations, ports, railway companies,

2. Every shop or establishment within meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months;

3. Such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.

Central government notification

Central government by virtue of clause (c) has specified Motor transport undertakings,

Clubs, chambers of commerce and industry, Institutions, societies, Trusts and circus

industry in which 10 or more persons are employed or were employed on any day of the preceding 12 months, as classes of establishments to which the Act shall apply.

Applicable once, continuous to be governed by PGA 1972

It is applicable even after the number of persons employed has fallen below ten. 

Who is an employee

According to Section 2 (e), employee means any person employed on wages in establishment as defined under section 1(3) of Payment of Gratuity Act, 1972 to do any skilled, semiskilled, or unskilled, manual or supervisory, technical or clerical work,

whether the terms of such employments are express or implied and whether or not such person is employed in managerial or administrative capacity but does not include any such person who holds a post under the central or a state government and is governed by other Act or by any rules providing for payment of gratuity.

Time when Gratuity becomes payable

As per section 4(1) of payment of gratuity Act 1972, gratuity shall be payable to an employee on termination of his employment after he has rendered continuous service of five years or more.

a. On his superannuation, or

b. On his retirement or resignation, or

c. On his death or disablement* due to accident or disease. (for clause C completion of continuous service of five years is not necessary)

* Disablement means such disablement as incapacitates an employee for work which he was capable of performing before accident or disease resulting in such disablement.

Continuous service

According to section 2A, for purposes of Act

1. An employee is said to be in continuous service for a period if he has for that period been in uninterrupted service including service which may be interrupted on account of accident, sickness, leave, absence from duty without leave, layoff, strike or a lock-out or cessation of work not due to any fault of employee.

2. Employee other than employee employed in seasonal establishment if he is not in continuous service within meaning of above point (1) for any period of one year or six months, he is deemed to be in continuous service under the employer

3. For said period of one year, if employee during the period of 12 calendar months preceding date with reference to which calculation is to be made, has actually worked under employer for period of at least 190 days in case of employee employed below ground in mine or in an establishment which works less than six days a week and 240 days in other cases.

4. For said period of six months, if employee during the period of six calendar months preceding date with reference to which calculation is to be made, has actually worked under employer should be half the number of days actually worked which constitute continuous service for period of one year i.e. ninety five days and 120 days respectively.

5. Employee of seasonal establishment is not in continuous service within meaning of clause 1 of above for any period of one year or six months, he shall be deemed to be in continuous service under employer for such period if he is actually worked for at least seventy five percent of number of days on which establishment was in operation during such period.

Service is not continuous in case of legal termination of service and subsequent re- employment.

To whom gratuity is payable: It is payable to

1. Employee :- Normally to employee himself

2. Nomination or heir :- In case of death of employee it is paid to nominee and if no nomination has been made then it is paid to heir

3. Deposited with controlling authority: – where nominee or heir is minor then the amount is deposited with controlling authority who shall invest in bank or other financial institution, as may be prescribed, until such minor attains majority.


However in case any gratuity received by persons covered under the Payment of Gratuity Act, 1972the gratuity limit has been increased from 10 lacs to 20 Lacs wef 29.03.2018 through notification S.O. 1420 (E) dated 29.03.2018

Compulsory Insurance

1. all the employers must an insurance from the Life Insurance Corporation or any other prescribed their liability of payment of Gratuity

2. if the employee ha already established an approved gratuity fund he maybe exempt from section (1)

3. the employer shall get company registered with the Controlling Authority within time

4. appointment of the Bord of trustees by the appropriate government

5. every employer shall be liable to pay the contribution by way of premium to approve gratuity fund


1. the employee must appoint a nominee

2. the employee can distribute the gratuity in more than one nominee

3. if the employee has a family then he should nominate any of the family members and not a outsider

4. nomination can modify and when by the employee

5. if the nominee the employee he has to make a fresh nomination

6. every change in the nomination has to be employer which must be kept in a safe custody.

Gratuity Claim

  • A person eligible for gratuity shall give in writing to the employer
  • The employer shall determine the amount of gratuity and give a notice in writing to employee to receive the gratuity when due.
  • The employer shall the make the Gratuity payment within 30 days to due.
  • Amount is not paid during the specified time by the employer, he shall pay a simple interest for the delayed time at rate as the government,
  • Any dispute regarding amount of gratuity or the person receiving Gratuity shall be paid the Controlling Authority.
  • Any aggrieved party can make an appeal to the appropriate government within 60 days from receipt of orders.

Appointment power of Inspector- appropriate government can appoint as enquiry. The have the power to conduct investigation collect evidence require to produce the copies

Recovery of Gratuity

The controlling authority on application from the aggrieved party issue a Certificate to the collector to recover the amount of Gratuity payable from the employer along with the compound interest.


Making false statements or false representation- Imprisonment 6 months

  • Fine upto 10,000 or both
  • Any contravention of provision by employer Imprisonment 6 months
  • Fine upto 20,000 or both Income tax on gratuity received
  • The gratuity received by any government employee wholly exempt


Incase of Government servants the upper ceiling on gratuity has been increased from 10 lakhs to 20 lakhs.

Considering inflation wages increase of employees of private sector maximum extent 20 lakhs.


Rajesh Kumar

The author provides end to end consultancy and support services relating to formation of Gratuity Trust, investment of trust money, drafting of trust deeds & board resolutions , amendment in trust deed  and winding up of trust. He can be reached at rajeshkumar9716@gmail.com


Name : Rajesh kumar

Location:NEW DELHI
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► Tags : #Gratuity #RetirementBenefit #EligibilityCriteria #GratuityAct1972

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