Gratuity

Introduction
Gratuity is a statutory terminal benefit payable by an employer to an employee on termination of employment by retirement, superannuation, resignation after qualifying service, death or disablement. In India, gratuity is both a social welfare measure and an employment-rights issue that frequently gives rise to disputes on eligibility, computation and enforcement. For practitioners, mastery of the Payment of Gratuity regime and its interaction with income‑tax rules, appointment terms and principles of construction is indispensable for effective client counselling and litigation.

Core Legal Framework
– Primary statute: The Payment of Gratuity Act, 1972 (the Act).
– Section 2: Definitions — notably “employee”, “employer”, “wages”, “continuous service”, and “establishment”. These definitions determine coverage and the unit of calculation.
– Section 4: Right to gratuity and amount — prescribes the circumstances in which gratuity is payable, eligibility thresholds and the basic formula for calculation (15 days’ wages for every completed year of service; provisions for part year in excess of six months).
– Other operative provisions (practical headings): application of the Act to establishments (coverage threshold), nomination, mode/time of payment, dispute resolution through Controlling Authority/Appellate Authority and penal provisions for default.
– Tax treatment: Income‑tax law provides exemption for gratuity under the Income-tax Act, 1961:
– Section 10(10) (government employees) and Section 10(10A) (other employees) — these provisions prescribe when gratuity received is exempt from tax and the limits applicable for non‑government employees (subject to statutory ceilings and conditions).
– Ancillary law:
– The Limitation Act, 1963 — limitation for suit/recovery claims (practitioners usually rely on limitation for money claims; check contemporaneous state practice and precedents).
– Contract law and service rules — terms in appointment letters and standing orders interact with the statutory right but cannot oust statutory minima under the Act.

Practical Application and Nuances
How eligibility arises (the common fact patterns)
– Retirement/superannuation: gratuity becomes payable on retirement if continuous service meets the statutory criteria.
– Resignation: gratuity is payable only if the employee has completed the qualifying continuous service (typically five years), except in cases of death or disablement where the five‑year requirement is waived.
– Death/disablement: statutory gratuity is payable to nominees/legal heirs irrespective of the five‑year rule.

Calculation — the working formula and practice points
– Basic statutory rule (practical formula): Gratuity = (Last drawn “wages” × 15/26) × Years of continuous service.
– “Last drawn wages” for calculation ordinarily means basic pay + dearness allowance (where DA is linked to pay and forms part of wages under the Act). Whether other components (commission, incentive, bonus, HRA) are “wages” depends on their statutory characterization and whether they form part of the regular remuneration.
– 15/26 arises because gratuity is 15 days’ wages for every completed year; wages are reckoned on a 26 working‑day month convention.
– Rounding/computation: Years are counted as completed years; practice and some decisions count service of six months or more as a year (Act provides for a part year in excess of six months to be rounded up); maintain clear spreadsheets in pleadings.
– Monetary ceiling: the Act contains a ceiling on the amount of gratuity payable (amendments have raised this ceiling over time; confirm the present statutory ceiling). Practitioners must check the prevailing ceiling and whether an employer’s gratuity scheme provides for larger benefits.

Evidence required and best documentary proof
– Appointment letter, service book/attendance registers, PF and salary records, last drawn salary slip, order of retirement/relieving letter, nomination form, death certificate (if applicable), medical/accident records (for disablement cases).
– For disputes on “wages” composition, regular payroll entries, minutes authorising DA, and employer’s own pay policy are decisive.
– Maintain contemporaneous computation memos showing month‑wise wages, DA linkage and the arithmetic of the gratuity calculation.

Common dispute issues and how they play out in practice
– Whether employer is covered: many litigations begin with contest on whether the establishment falls within the Act (coverage threshold, nature of business). Check employee numbers, dates of employment and any notifications/exemptions by the State.
– Whether the employee has completed continuous service: break in service, unauthorized leave, absences due to suspension or lay‑off — each has statutory treatment. Obtain attendance and leave registers to preclude artificial breaks asserted by employer.
– Inclusion of DA: wage component disputes are the most common. If DA is linked to cost of living and paid as a percentage of pay, courts frequently include it for gratuity computation. Where DA is ad hoc or festival bonus‑style, it may be excluded.
– Contractual clauses attempting to limit gratuity: service agreements cannot contract out of the Act’s mandatory provisions. However, if an employer has a bona fide gratuity scheme that is at least as beneficial as the Act, the scheme can govern.
– Death and nominees: nomination formalities are central. In the absence of nomination, legal heirs can claim; disputes often require probate or family‑tree evidence.

Procedure to claim and enforce gratuity
– Pre‑litigation: issue a statutory demand/notice giving opportunity to pay; keep the record of communication.
– Forum: Claims under the Act are typically pursued before the Controlling Authority (appointed under the Act) and, thereafter, the Appellate Authority. In practice, many litigants also initiate civil suits in appropriate Civil Courts; forum selection may affect limitation and execution procedures.
– Interim relief: secure ad interim payment where delay will cause irreparable hardship — courts may grant partial payment based on prima facie entitlement and salary records.
– Execution: gratuity declared payable becomes a debt recoverable; enforcement options include execution of decree, recovery as arrears (depending on statutory mechanism), or attachment of employer’s assets in insolvency contexts. In government/employer default, recovery may be pursued as public demand if the statutory machinery permits.

Landmark Judgments (principles to remember)
– On computation and inclusion of dearness allowance: Courts have consistently held that components that are integrally linked to pay and are payable regularly (e.g., dearness allowance) must be included in “wages” for the purpose of gratuity calculation. Practitioners should cite relevant precedents of the relevant High Court/Supreme Court in their jurisdiction showing how “wages” has been construed.
– On protection of statutory right: Judicial authorities have held that contractual provisions which curtail or nullify statutory gratuity rights are void; a gratuity scheme can apply if it is not less favourable than statutory provisions.
– On enforcement and remedy: Courts have treated unpaid gratuity as a statutory debt and have provided summary remedies to secure payment, including interim awards and directions for immediate payment in clear cases.

(Practical note for citation: cite the leading decisions of the concerned High Court and the Supreme Court on (i) what constitutes ‘wages’ for gratuity, (ii) computation controversies, and (iii) jurisdictional issues under the Act. Jurisprudence is extensive and fact‑dependent; always verify the controlling precedent in your territorial jurisdiction.)

Strategic Considerations for Practitioners
For claimants (employees/nominees)
– Early collection of documentary proof: service book, wage sheets, PF records, nomination forms and resignation/relieving orders.
– Pre-calculate several variants: (a) conservative calculation (basic only), (b) inclusive calculation (basic + DA), and (c) employer’s claimed position — present these in the notice and pleadings to box the employer.
– Raise interim applications for ad interim payment in cases of death, disablement or where the employer is resisting on technical grounds.
– Challenge jurisdictional pleas promptly; don’t permit dilatory tactics by the employer.
– Consider alternate remedies: statutory authority reference vs civil suit — weigh execution and timescale.

For respondents (employers)
– Maintain immaculate payroll records and contemporaneous policies linking DA to pay.
– When denying liability, issue detailed reply to notice explaining computation and identify documents relied upon; when liability is bona fide but there is cash flow difficulty, negotiate structured payment with admitted liability to avoid penalties.
– Be cautious with settlement agreements: full and final releases should be clear about gratuity to avoid later reopening.

Common pitfalls to avoid
– Accepting oral calculation figures without insisting on supporting payroll documents.
– Relying on internal HR interpretations rather than signed boards’ resolutions for DA and pay structures.
– Missing the limitation window for filing claims — act promptly once gratuity becomes payable.
– Overlooking tax consequences and documentation for tax exemption under Income‑tax Act at the time of payment.

Conclusion
Gratuity is a statutory right that touches the intersection of labour welfare, payroll practice and tax law. For practitioners, success turns on meticulous documentary preparation (appointment letters, payroll registers, DA linkage), a precise arithmetic of entitlement, and early tactical moves — statutory notices, interim reliefs and correct forum selection. Disputes commonly pivot on the definition of “wages”, the continuity of service and nomination formalities; these are the battlefields where cases are won or lost. Always check the latest amendments to the Act (monetary ceilings and coverage rules) and the latest Supreme Court/High Court precedents in your jurisdiction before filing or defending claims.