Why gratuity is a scoring topic

Gratuity is a lump sum the employer pays as a thank-you for long service. It is entirely employer-funded, nothing is deducted from the employee’s salary, and it is paid when the job ends. For the APFC paper it is attractive because almost every rule is a number: 10 employees, 5 years, 15 days, 26 days, 240 days, 30 days, ₹20 lakh. Learn the numbers with their logic and you can pick up one or two sure marks.

Who is covered

The gratuity chapter applies to every factory, mine, oilfield, plantation, port, railway company, and every shop or establishment in which ten or more employees are employed, or were employed on any day of the preceding twelve months. Once an establishment is covered it stays covered even if the headcount later falls below ten. There is no wage ceiling for coverage, so a manager and a clerk are equally entitled.

When gratuity becomes payable: the five-year rule

Under Section 53, gratuity is payable on termination of employment after at least five years of continuous service on:

• superannuation;
• retirement or resignation;
• death or disablement due to accident or disease;
• termination on expiry of fixed term employment;
• any other event the Government notifies.

The five-year condition is not required for death, disablement or the expiry of fixed term employment. Fixed-term employees get gratuity on a pro-rata basis, and the Labour Ministry’s November 2025 explainer on the Codes described this as gratuity after one year instead of five. For working journalists, five years is read as three years. On death, gratuity goes to the nominee or, if none, to the legal heirs; a minor’s share is deposited with the competent authority.

Continuous service: 240 and 190 days

Continuous service means uninterrupted service, and it is not broken by sickness, accident, authorised leave, lay-off, a legal strike, a lockout or a stoppage of work that is not the employee’s fault. Where service was not uninterrupted for a full year, the employee is deemed to be in continuous service for one year if he actually worked:

• 190 days in the preceding twelve months if employed below ground in a mine or in an establishment working less than six days a week;
• 240 days in any other case.

For a six-month period the figures are 95 days and 120 days. Days of lay-off, maternity leave (up to the permitted weeks) and paid leave count as days worked.

How gratuity is calculated

For every completed year of service, or part of a year in excess of six months, the employer pays 15 days’ wages at the rate last drawn. For a monthly-rated employee, 15 days’ wages = monthly wages ÷ 26 × 15. The 26 is used because a month is taken to have four paid weekly offs.

Formula: Gratuity = last drawn monthly wages × 15 ÷ 26 × completed years of service.

• Seasonal establishments: 7 days’ wages for each season.
• Piece-rated employees: daily wages are the average of total wages for the three months immediately preceding termination.
• Wages here follow the uniform definition in the Code, so if excluded allowances exceed 50% of total pay, the excess is added back. Many employees therefore see a higher gratuity base under the Code.

The total cannot exceed the notified ceiling, but an employer may pay more under an award, agreement or contract. The Code sets a floor, not a limit on better terms.

Worked examples

Payment, interest, nomination, insurance and forfeiture

Payment and interest

The employer must determine the amount and pay it within 30 days of it becoming payable. If he does not, he pays simple interest from the due date at the rate notified by the Government, unless the delay was the employee’s fault. Disputes about the amount or admissibility go to the competent authority under Section 58.

Nomination

Every employee who has completed one year of service makes a nomination (Section 55). If he has a family, the nomination must be in favour of family members.

Compulsory insurance

Section 57 requires the employer to insure his gratuity liability with an approved insurer, unless he has an approved gratuity fund.

Forfeiture

• If 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 damage.
• If termination is for riotous or disorderly conduct or violence, or for an offence involving moral turpitude committed in the course of employment, gratuity may be forfeited wholly or partially.

Forfeiture is possible only where there is a termination order for that misconduct. Mere allegations are not enough.

Quick-revision table

High-yield traps

For the full chapter-wise picture of the Code, including EPF, ESI, maternity and gig workers, see CrackTarget’s Code on Social Security 2020 notes.

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