When Is an Employee Eligible for Gratuity?

Under the Payment of Gratuity Act, 1972, an employee becomes eligible for gratuity after completing a specified period of continuous service with their employer. The gratuity is a statutory benefit given to employees upon their retirement, resignation, or in some cases, death or disablement.

Eligibility for Gratuity:

Minimum Service Requirement:

An employee must have rendered at least 5 years of continuous service to be eligible for gratuity.

Continuous service refers to uninterrupted employment, even if the employee is on sick leave, paid leave, or holiday. Periods of leave are also counted toward the 5 years of continuous service.

Gratuity on Resignation or Retirement:

An employee who retires or resigns after completing 5 years of service is eligible for gratuity.

If an employee leaves the company voluntarily or due to retirement, they are entitled to receive the gratuity amount based on their last drawn salary and years of service.

Gratuity in Case of Termination:

If an employee is terminated, except in cases of misconduct, they are entitled to gratuity.

Dismissal for misconduct: If an employee is dismissed for misconduct, they do not receive gratuity, as per the provisions of the Act.

Gratuity on Death or Disablement:

In cases of death or permanent disablement of an employee, the gratuity is payable even if the employee has not completed 5 years of service.

In the event of death or disablement, the nominee or legal heirs of the employee are entitled to receive the gratuity amount.

Gratuity for Employees of Government and Public Sector Undertakings:

Employees working in the government sector or public sector undertakings are also entitled to gratuity based on the same eligibility criteria.

Voluntary Resignation Before 5 Years:

If an employee resigns voluntarily before completing 5 years of continuous service, they are not eligible for gratuity, except in cases of death or disablement.

Example:

Let’s consider an employee who has worked with a company for 6 years and is now retiring:

Eligibility:

The employee is eligible for gratuity because they have completed more than 5 years of continuous service.

Calculation:

The last drawn salary is ₹30,000 per month.

Gratuity = (Last drawn salary × Years of service × 15) ÷ 26

Gratuity = (₹30,000 × 6 × 15) ÷ 26 = ₹1,38,461.

Payment:

The employee is entitled to receive ₹1,38,461 as gratuity upon retirement.

Conclusion:

An employee becomes eligible for gratuity under the Payment of Gratuity Act, 1972 after completing at least 5 years of continuous service. Gratuity is paid upon retirement, resignation, or in case of death or disablement of the employee. In cases of termination for misconduct, the employee is not eligible for gratuity. The gratuity amount is calculated based on the employee’s last drawn salary and years of service.