Is Gratuity Payable After 4 Years and 5 Months? Seeking Clarity on the Rules

Good morning all seniors. Though I am aware that gratuity is applicable only after completing 5 years of service with one employer, I have recently heard from my peers that it is applicable even after completing 4 years and 5 months or so. Is it true? Is there any law regarding the same? Please guide.

Dear Preeti, according to the Payment of Gratuity Act 1972, you are eligible after the completion of 5 years.

With Regards,
Vineet Deshmukh

Some companies now also follow the rule that in the 5th year, an employee needs to have worked for 240 days to become eligible for gratuity. So, as far as I understand, it is 4 years and 240 days.

In our organization, we provide gratuity for members who have completed 4 years and 8 months, as mentioned by Mr. Balaji.

Warm Regards,
Lydia

It is true that you will be eligible for gratuity after 4 years and 240 days as it will be considered 5 complete years of service. Serving any company for 240 days is regarded as 1 completed year of service. Therefore, 4 years and 240 days equal 5 years of service, making you eligible for gratuity.

Hope this simple explanation clears all your doubts.

Regards

Clarification on Gratuity Eligibility

Please be very clear that gratuity is applicable only after the completion of 5 years, and not even one day of shortage is acceptable as per the Gratuity Act. People often get misguided by the Madras High Court judgment. The Payment of Gratuity Act has not been amended yet. It is applicable only after the completion of 5 full years of service.

The 240 days+ calculation is relevant from the 6th year of service onwards (of course, in the same organization). Let us not get confused on this issue.

Best wishes,
Sundararaman

[QUOTE=Preeti Jawadekar;1698628]Good morning, all seniors. Though I am aware that gratuity is applicable only after completing 5 years of service with one employer, I have recently heard from my peers that it is applicable even after completing 4 years and 5 months or so. Is it true? Is there any law regarding the same? Please guide.

Dear Preeti,

The law states very clearly that an employee is eligible for gratuity on completion of 5 years of service calculated exactly from the date of joining. Only after satisfying the eligibility criteria does the question of service period calculation arise. It is +1 year if the employee has completed 6 months of service in the subsequent year.

Further, there is no law stating that 240 days equal 1 year of service. The concept of 240 days or two-thirds attendance (since 240 days = two-thirds of 365 days, i.e., 1 year) is purely to calculate the eligibility criteria for an employee to avail of the earned leave during their 1st year of service with an establishment.

Regards,
Vimal Radia
[Phone Number Removed For Privacy Reasons]

What about if the partnership company closes down when I have worked only for 4 years and six months, or say I am short of 5 years of work? Am I eligible for gratuity?

Thank you.

Dear Vimla,

Please take time to read the Gratuity Act itself. The definition of the term “continuous service” in Section: 2 Definitions is as below:

Section: 2 Definitions

(b) “completed year of service” means continuous service for one year;

[2] [(c) "continuous service" means continuous service as defined in section 2A;]

Section: 2A Continuous Service

For the purposes of this Act:

(1) An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave...

(2) Where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer:

(a) For the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than:

(i) One hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and

(ii) Two hundred and forty days, in any other case.

As per this definition, 240 days of service should be considered as one year of continuous service. Please don't get distracted by any other saying. There are a lot of judgments to this effect, one cited below:

Mettur Beardsell Ltd Madras vs Regional Labour Commissioner (Central), Madras, 1998 LLR1072 (Madras High Court)

My reasons for saying so are given above. Please educate me if I am wrong.

Regards

Vimal,

What about if the partnership company closes down when I have worked only for 4 years and six months, or say I am short of 5 years of work? Am I eligible for gratuity?

Dear Aniamin,

I am sorry to inform you that in such cases, you are not eligible for gratuity.

Regards,
Vimal Radia
[Phone Number Removed For Privacy Reasons]

I would like to quote our Senior Moderator, Mr. J.S. Malik's reply on the same subject from other posts for your reference.

Gratuity Eligibility

Gratuity is applicable only after 5 years of completion of service within the same organization by any employee. The 240-day calculation begins from the 6th year onwards.

Regards,
Sundararaman

QUOTE

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JS Malik - Senior Moderator in Cite HR

Subject: Re: Gratuity Calculation

Dear [Recipient's Name],

Your husband has not completed 5 years of service, so he is not entitled to receive gratuity. Some people mention the judgment of the Madras High Court, stating that if an individual has completed 240 days in the fifth year, they become entitled to gratuity. However, this is not accurate as, according to the Gratuity Act, one is eligible for gratuity after completing 5 years of service. One judgment does not alter the Gratuity Act.

Regards,
J.S. Malik

Noida, Uttar Pradesh

Mobile: [Phone Number Removed For Privacy Reasons]

I would like to correct my name as VIMAL and not VIMALA. I fully agree with you regarding the criteria for completed years of service and continuous service. However, the eligibility criteria for the payment of gratuity remain as the completion of 5 years of service. The consideration of completed years of service and continuous service becomes significant only after the completion of 5 years.

Regards,
Vimal Radia

First of all, sorry Vimal for misquoting your name. But with due respect, I have been to many Labour Commissioners' Offices and have seen numerous cases in my daily course where the following rule is applied regularly, and people receive gratuity based on this rule:

4 years + 240 days = Eligible for gratuity

It is not merely a matter of a single judgment being delivered on this 240 days rule. This 240 days rule has extensive applicability.

In the case of Dalmia Magnesite Corporation vs. Regional Labour Commissioner on November 12, 1980, Citation: 1981 (43) FLR 17, this judgment outlines how to apply the 240 days rule, what to include in these 240 days, and what not to include. This 240 days rule starts applying from the first year itself. Reading this judgment along with the one I posted earlier from the Madras High Court will provide clarity on the matter.

What does section 4 under the Payment of Gratuity Act say?

Section 4: Payment of Gratuity

(1) 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:
- (a) on his superannuation, or
- (b) on his retirement or resignation, or
- (c) on his death or disablement due to accident or disease.

Provided that the 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.

Can you clarify the relationship between Section 4 and 2A (2)?

Regards,
Pradipta

Dear Sir, Thank you for clearing my doubt. One thing I wanted to know is, is there any law stating that 240 days equal 1 year of service? Yes, but its applicability is a highly debatable question. Follow the thread as there is a brainstorming discussion ongoing.

Regards, Vimal Radia [Phone Number Removed For Privacy Reasons]

Eligibility for Gratuity Under the Payment of Gratuity Act, 1972

Section 4 of the Payment of Gratuity Act, 1972, provides that an employee will be entitled to gratuity upon the completion of continuous service of 5 years. While clarifying the 5 years of complete service, the Andhra Pradesh High Court held that the minimum period for becoming eligible for the payment of gratuity should not be less than 5 years, as it should constitute a complete 5-year service. It was further clarified that the words "or part in excess of six months" are only meant for the purposes of computing gratuity for the subsequent year or years after the first complete 5 years. It was also held that if an employee has worked for 4 years, 11 months, and 10 days, they will not be eligible for gratuity due to the lack of completion of 5 years.

In a subsequent case, the Madras High Court, while relying upon the clarification by the Supreme Court pertaining to 240 working days in one year being deemed as continuous service of one year, held that there should not be a complete 12 calendar months of service. The Madras High Court further ruled that an employee who has served for 4 years, 10 months, and 18 days within the 5 years will be entitled to gratuity.

Regards,
Viswam

After completion of 5 years of employment service, you are eligible for payment under the Gratuity Act of 1972.

Regards,
K.S. Arumukarajen

Dear all,

It totally depends on the formula for gratuity. If your company is following the below formula: Basic + DA * 15/26 * number of years of service, then 4 years and 6 months will be considered as 5 years, but 4 years and 5 months will be considered as 4 years.

If your company is following the formula for gratuity: 4.81% of basic + DA * number of months of service, then the exact 5-year rule will be applicable.

Please revert if I am wrong.

Regards,
Sarvesh

So, can I take it that in 4 years and 240 days, the person will be eligible for Gratuity, but will be credited for gratuity only after 5 years of complete service? Please suggest whether I am understanding it correctly or not.

Dear all, I fully respect all the views mentioned in this brainstorming session. I partially agree with both of the views. Yes, it is possible to agree with both.

Gratuity Eligibility Under the Gratuity Act

As per the Gratuity Act, an employee is eligible for gratuity only after completing 5 years of service. However, whenever the matter has gone to the judiciary for a decision, the learned courts have always taken a judicial approach along with a humanitarian aspect and calculated the 5th year based on the law of 240 days as a year.

Now the ball is in the court of the Indian Government to amend the Gratuity Act and make the necessary changes. However, as always, the government is still relying on fate. We are still adhering to the old laws of ancient times.

According to the law, it is 5 years, but in practice, it is considered as 4 years + 240 days. Many companies have started implementing the 4 years + 240 days rule as a goodwill gesture and have incorporated it into their HR policies. However, some companies are still sticking to the written law/Gratuity Act in order to retain the hard-earned money of their employees who have dedicated 4.5 years of their valuable lives to them. Neither approach is inherently wrong; it all depends on perspective.

HR professionals should remember that when matters are brought to the court, the decision will be made in the best interest of law, equity, and justice. Jai Hind.

Thanks & Regards,

Amarjeet Singh

Former Advocate and now DGM HR

Osaw Agro Ind., Ambala Cantt.

[Phone Number Removed For Privacy Reasons]

It is true that the Gratuity Act specifies 5 years of completion in service, but he/she could be eligible if they have completed 4 years and 240 days, or 8 months, as serving the company for 240 days means completion of a year in the services.

Regards,
Mala R. Sawant
[Phone Number Removed For Privacy Reasons]

Dear All, if you see, we are talking about beneficial legislation, which means that we have to give the most liberal interpretation possible. The same rule is applied by the Court if you go to court. Therefore, it is better to adopt the policy of 4 years + 240 days to avoid any unnecessary litigation.

Dear Mr. Amarjeet Singh,

I wholeheartedly agree with your perspective. A solution with a HUMAN FACE. However, such concern for employees is rare with steadfast managements.

I also thank all those involved for their valuable contributions to the discussion, with a special mention of Mr. Tyagi.

I hope Ms. Preeti has reached a conclusion on the matter.

Regards,
Vimal Radia
[Phone Number Removed For Privacy Reasons]

Gratuity Eligibility

Gratuity is payable if you complete 4 years and 240 days of working in the next year, i.e., the 5th year in continuous service.

Regards,
Sharad Choudhary

Dear Viswam, I have a doubt. "MADRAS HIGH COURT decision for 4 years, 10 months, and 18 days in the 5th year will be entitled to gratuity." Is this decision applicable for other states? Thanks in advance.

Regards, Krishna

Nice input from so many experts. But still, I feel the Gratuity Applicability is only after the completion of 5 full years. Anyway, it all depends on the organization and how they treat their employees. If the organization wants to pay for those who have completed 4 years + 240 days of gratuity, fine.

In case any organization/company decides to pay gratuity only after the completion of 5 years, then the concerned employee needs to take a call on whether to resign or continue with the organization to complete 5 full years of service.

Here the concerned employee may ask one question: "I am getting a better opportunity; they will not wait for me to complete 5 years for gratuity eligibility, etc."

In that scenario, the employee should act wisely, calculate and add their gratuity amount (which he or she would have got from the present organization) divided by 12 or 18 months, add up to their expectation from the future employer, and settle for the deal! If the candidate is a good fit, the future employer will pay that amount (all these negotiations without revealing to the future employer that the candidate has added up their gratuity amount which is being forfeited just because 5 full years of service were not completed).

Resigning Close to 5 Years

I would request the employees to be very careful before opting for the same—unless otherwise, the offered employment is too good in many aspects.

Think, think twice or thrice before we act. Good wishes,

Sundararaman

The Purpose of the Payment of Gratuity Act

The Payment of Gratuity Act is framed for the purpose of providing social security to employees. This is the main and core objective behind the act.

Eligibility for Gratuity

Now, coming to our discussion, the Gratuity Act requires 5 years of continuous service to be eligible for the gratuity amount. The act clearly states and conveys that employees become eligible for gratuity only after completing 5 years of continuous service, not a day more. If an employer sets the eligibility at 6 years, they would be guilty in the eyes of the law.

Employer's Discretion and Social Responsibility

The heart of the matter is that it is an employer's choice to pay gratuity to an outgoing employee even if they have not completed 5 years. If the service period is more than 5 years, the employer is obligated to pay. However, what I believe is that the employer should prioritize the social security of outgoing employees over other considerations and should pay even if it does not align with the criteria of the Act. After all, the employee has worked for us and contributed significantly to the company's growth.

Be Humanistic.

Have a Good Day.

Dear Mr. Rinkesh, you have concluded with excellent words: "Be Humanistic." Fantastic.

Humanistic Approach in Employment

Both ways—from the employee side and from the management side—being humanistic does apply, along with the performances of the employees, which keep them in employment in the same organization for 4 years and 240 days or so.

Hence, considering the aspects of benefits, other good things, or even gestures the employee enjoyed from the management of the company, the employee can also be humanistic to continue with the same job (to complete the 5 years in full to become eligible for gratuity under the Gratuity Act).

Still, if the employee gets a much better opportunity and the future employer cannot wait, then the option is very much in the hands of the employee on how to get compensated for the losing amount by way of gratuity.

For example, Mr. A or Ms. B is drawing 20,000 (basic + DA) and worked for 4 years and 240 days. Then the gratuity amount (which is being argued above) would work out to Rs. 20,000/26 days x 15 days x 5 years = 57,692 / 12 months (comp: 4,808) or 57,692 / 18 months (comp: 3,205). The employee who decides to quit can as well add up this much amount with their expectation, and both ways it suits; the future employer is going to offer the package the employee finally settled in for.

Humanity and Integrity from the Employee

Hence, the humanity (or integrity!) too should come from the employee. Having enjoyed the benefits of the company for 4 years and 240 days, the same employee can as well be "humanistic" to the management.

He or she can either wait for the completion of 5 full years, then try for other jobs, or he or she should be ready to forgo the gratuity from the present organization (if at all the company strictly follows the gratuity applicability rules) and be smart enough to get compensated from their future employer by adding to their expected package.

This won't be applicable to the organization or company that would be kind enough to consider paying the gratuity amount to an employee who preferred to leave after serving 4 years and 240 days, which is being argued as above.

Regards,
Sundararaman

Dear seniors, please let me know if an employee has completed continuous service of 5 years, but during these 5 years, he took a 6-month leave for hospitalization. Is he eligible for gratuity?

I have completed 5 years in the current organization and am continuing. Since I have completed 5 years of service, is it possible to withdraw the gratuity amount while still in the same company and continue in the same organization?

When I asked my HR, they said, "As per the Government Order, you will receive the gratuity amount only when you leave the organization." Is this true? I need some money urgently, so I am planning to withdraw my gratuity.

If it's possible, I would like to take my 5 years of gratuity and continue in the same organization. Later, after 2 years, if I decide to leave the organization, will I receive the remaining 2 years' gratuity amount? Please reply and help me as soon as possible.

Thanks in advance,

Manohar Kumar T