Objective of PG Act

The Payment of Gratuity Act is a statutory benefit paid to the employees who have rendered continuous service for at least five years. It is a lump sum amount paid to an employee based on the duration of his total service. The benefit gratuity is payable to an
employee on cessation of employment (either by resignation, death, retirement or termination, etc) by taking the last drawn salary as the basis for the calculation.


It is applicable where ten or more persons are employed, or were employed, on any day of the preceding twelve month


An employee who has rendered not less than five years of service becomes entitled to gratuity on his superannuation or on his retirement or resignation or on his death or
disablement. The pre-requisite of 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.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.

Meaning of Continuous Service

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. An employee shall be said to be in
continuous service for a period if he has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

Calculation of Gratuity

Gratuity is calculated at 15 days wages last drawn by the employee for each completed year of service. The monthly Basic Salary is divided by 26 and multiplied by 15. In computing a completed year of service the period in excess of six months shall be taken as a full year.

Gratuity = Monthly salary / 26 x 15 days x No. of years of service.

The maximum amount of gratuity payable under the Act is Rs.20 Lacs.

Compulsory Insurance

The Payment of Gratuity (Amendment) Act, 1987 has prescribed provisions for compulsory insurance for employer’s liability for payment towards the gratuity under the Act from LIC under the LIC Act,1956 or any other prescribed Insurer.


Each employee who has completed one year of service is required to make a nomination for the purposes of gratuity in case of his death. There can be more than one nominee. (Form F). Nominees may be changed at any time by the employee, by giving a written notice to the employer. (Form H). If no nomination has been made, it shall be paid to the legal heirs of the deceased employee.

Protection of Gratuity

No gratuity payable under the Act shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court. However if the employee had agreed to a deduction from the amount due as gratuity then that amount can be recovered.

Forfeiture of Gratuity

if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment, gratuity shall be forfeited to the extent of the damage or loss so caused or may be forfeited wholly or partially.

Time Limit for Payment of Gratuity

The employer must pay the amount of gratuity within 30 days from the date it becomes payable to the person to whom the gratuity is payable.

Failure to Pay Gratuity Amount

Any employer who contravenes or makes default in complying with any of the provisions of this Act or any rule or order made there under shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or with fine which shall not be less than Rs.10000/-but which may extend to Rs.20000/-, or with both.

Remedy in Case the Employer Does Not Pay Gratuity

If the amount of gratuity is not paid by the employer within the prescribed time to the person entitled thereto, the aggrieved person should make an application to the Controlling Authority

Income Tax Exemption

The gratuity received up to the limit of Rs.20 Lacs is liable to be exempted from taxation under the Income Tax Act. The exemption is, however, not available for payment of gratuity when the employee is still in service.

Whether employee is eligible for gratuity for less than 5 Yrs Service

As per the judgement of the Supreme Court an employee is eligible for gratuity if he has completed 4 years of continuous service and 240 days continuous working in 5th year. On the day when he completes his 240 days in the 5th year he will be eligible for gratuity.

The judgement of Supreme Court rendered under the provisions of the Industrial Dispute Act in Surendra Kumar Verma vs. Central Govt. Industrial Tribunal,[(1980) (4) S.C.C.433)], it is enough that an employee has a service of 240 days in the preceding 12 months and it is not necessary that he should have completed one whole year’s service. As the definition of continuous service in Industrial Dispute Act and Payment of Gratuity Act are synonymous, the same principal can be adopted under the act also and hence an employee rendering service of 4 year 10 months 11 days is considered to have completed 5 years continuous service under sec.4(2) and thereby is eligible for gratuity.”

Now almost all organisations are paying gratuity if an employee has completed 4 years of continuous service and 240 days continuous working in 5th year.