In continuation of what KK has said, I would like to say that leaves beyond the permitted leave available in the credit of the leave book would normally be unpaid leave. If the unpaid leave is granted, for whatever reasons, the same should be marked in the service as a break of service or continuous service. In the absence of this, there could be confusion regarding the treatment of the leave period (unpaid leave period) for the calculation of Gratuity.
Understanding Gratuity and Continuous Service
Under the Payment of Gratuity Act, in order to be entitled to gratuity, one should have continuous service, and a person is said to have continuous service only when they have 240 days of service in every 12 months. If there are unpaid days, the same would not be counted in the 240 days.
Regularized Unpaid Leaves
However, unpaid leaves that are approved and regularized, and against which there is no undertaking between the employee and the employer regarding its treatment for a break in service, will be considered as days worked and would qualify for gratuity. It may happen that an employee availing one or two months of unpaid leave may be in good terms, and you grant it as approved leave without any condition, but after some years, he may become a headache for the organization, and when he leaves, he would naturally demand his gratuity.
Importance of Undertakings
At that time, the question often asked is how to treat his absence? If you had an undertaking while granting two months' unpaid leave that the leave would not be counted as continuous service, then you are safe, and you can show your Board that you had proactively done it, and as such, he would not get gratuity because there is no continuous service.