Gratuity Calculation for Deceased Employee: Does Service Until Retirement Count?

If an employee expired during the service and after completion of 5 years uninterrupted service, what is the calculation of gratuity? Is he applicable for gratuity till the date of his probable retirement? Does the total service (till retirement) count for the calculation?

Gratuity Payment in Case of Death

Gratuity is payable in the case of death even if the eligibility period of 5 years of continuous service is not completed (Proviso to section 4(1) of the PG Act 1972). Various organizations have adopted voluntary coverage under which death with less than 5 years of service is compensated with at least 3 months' salary. Reckoning total service up to the normal date of retirement is a very rare welfare measure voluntarily undertaken by some organizations; otherwise, the calculation is based on fifteen days' salary for every completed year of service.

Yes, as per the Gratuity Act, the gratuity is payable up to the date of death irrespective of whether he completed five years or not. However, where the employee is covered by any group gratuity insurance scheme, a case may arise for payment of gratuity until retirement depending on the terms of the insurance cover.

B. Saikumar
HR & Labour Law Adviser
Navi Mumbai

Dear Sir,

In our company (Coal India Limited), all employees are covered under a group gratuity insurance scheme in collaboration with LIC. If any employee dies in harness, his nominee will be eligible for normal gratuity up to his death, and thereafter, gratuity is calculated based on the last wages drawn at the time of death until his notional superannuation date.

Gratuity Payment Policy for Employees Dying in Service

Dear Gautham,

The policy and practice of your company regarding the payment of gratuity to employees who pass away while in service are highly commendable. The Payment of Gratuity Act, 1972, also supports the right of employees to receive better terms of gratuity under any award, agreement, or contract with the employer, as stated in section 4(5) of the Act.

However, your reply suggests that the normal gratuity payable up to the time of death is covered by the insurer, while the remainder up to the notional superannuation date is handled by the company itself. Could you please clarify this?

Dear Umaknthan, I was not associated with the working of such a scheme as my organization didn't have it. However, I have been informed by some HR colleagues that some companies float such a group gratuity scheme by tying up with LIC. As per the information I gathered from them, I understand that a company enters into an agreement with LIC to frame the scheme in the company's name. The fund will be created by the premium deposited by the company every year. The premium will be calculated based on the number of employees, their age, date of joining, and their salary (basic + DA). LIC acts as a fund manager and invests the funds. It seems LIC assesses the fund liability every year based on the claims settled during the year and the fresh list of employees with all the above details submitted annually, including employees who have left and those who have joined during that year. Any shortfall in the fund will be made up for by the employer.

Salient feature of the scheme

The salient feature of this scheme seems to be that the liability of the employer to pay gratuity is borne by LIC, and the employee, in case of death during service, will be paid gratuity that could have accrued to him until retirement had he been alive. However, it is not clear to me whether an employee is paid gratuity even if he leaves before completing five years.

As you mentioned, the Gratuity Act permits any scheme with better terms. Anyone who is associated with the actual working of the scheme can better elaborate on it.

Regards, B. Saikumar HR & Labour Law Adviser Navi Mumbai

Having been associated with LIC tie-up in gratuity matter, it is confirmed that the most popular scheme is where the liability is limited to the death. Exponentially extending it to the date of retirement is not a statutory liability but is a voluntary welfare benefit which could be offered by LIC, but the premium would be manifold.

Hi all,

Details of LIC's Group Gratuity Cash Accumulation Plan.

Dear Umakanthan Sir,

We calculate gratuity up to superannuation by adding 60 years to his date of birth based on the last wages drawn at the time of his death (say A). Thereafter, we calculate gratuity up to the employee's date of death (say B). We pay the gratuity amount calculated as B, and the amount A-B is being claimed from LIC. After receiving this amount from LIC, we also pay it to the nominee of the ex-employee, subject to the condition that the total gratuity amount does not exceed Rs. 10 lakhs.