Payment of Gratuity Act Rules: 5-Year Threshold, 15/26 Formula & Tax Exemption

The **Payment of Gratuity Act, 1972** mandates that every factory, mine, oilfield, plantation, port, railway company, shop, or commercial establishment employing 10 or more individuals must pay gratuity to employees who separate after a prolonged period of service. Gratuity is not a discretionary bonus; it is a statutory right earned through loyal service. Employers cannot contractually opt out of paying gratuity through employment agreements or non-disclosure waivers.

Under Section 4(1) of the Act, gratuity becomes payable on the termination of employment after rendering **continuous service for not less than five years**: 1. On superannuation (retirement). 2. On retirement or resignation. 3. On death or disablement due to accident or disease (in which case the 5-year requirement is waived completely). ### The 4 Years and 240 Days Judicial Precedent A common dispute arises when an employee resigns after 4 years and 7 or 8 months. Under **Section 2A of the Act**, an employee is deemed to be in "continuous service" for a year if they have worked for at least: - **190 days** in a mine or 6-day work-week establishment. - **240 days** in any other commercial establishment (including IT companies and corporate offices). Multiple High Courts (including the Madras High Court in *Mettur Beardsell Ltd.* and the Supreme Court in *Surendra Kumar Verma*) have upheld that completing **4 years and 240 working days** qualifies an employee for statutory gratuity benefits.

For establishments covered under the Act, gratuity is calculated using a standard statutory formula: ``` Gratuity Payout = (15 × Last Drawn Basic Salary × Tenor in Years) ÷ 26 ``` ### Why Divide by 26 Instead of 30? The Supreme Court ruled that a standard working month contains 26 payable days, excluding 4 weekly holidays (Sundays). Thus, dividing monthly wages by 26 determines your exact single-day wage rate, which is then multiplied by 15 days of salary for each completed year. ### The 6-Month Rounding Rule: - Service of **5 years and 4 months** is rounded down to **5 years**. - Service of **5 years and 7 months** is rounded up to **6 years**. ### Practical Calculation: Assume an engineer resigns after 7 years and 8 months with a last drawn Basic Salary of ₹75,000 per month: ``` Years of service = 8 years (rounded up from 7y 8m) Gratuity = (15 × 75,000 × 8) ÷ 26 Gratuity = 90,00,000 ÷ 26 = ₹3,46,154 ```

### Section 10(10) Tax Exemption Gratuity received by non-government private sector employees is exempt from income tax under Section 10(10) of the Income Tax Act, 1961 up to the least of: 1. Actual gratuity amount received. 2. Statutory calculated limit `(15 × Last Basic × Years) ÷ 26`. 3. Lifetime statutory maximum ceiling of **₹20,00,000** (raised from ₹10 Lakhs). Any gratuity paid in excess of ₹20 Lakhs is added to the employee's taxable income and taxed at normal slab rates. ### Can an Employer Forfeit Your Gratuity? Under Section 4(6), an employer can only forfeit gratuity under very narrow, legally proven circumstances: - Forfeiture to the extent of damage caused by disorderly conduct, riotous behavior, or violence. - Full forfeiture if termination was due to an act constituting an offense involving **moral turpitude**, provided the employee was formally convicted by a court of law. Simple resignation or ordinary disciplinary termination does not entitle an employer to withhold gratuity.