Payment of Gratuity Act 1972: 240-Day Rule, Eligibility & Rules

1. Applicability & The 5-Year Service Baseline

The Payment of Gratuity Act 1972 is a mandatory retirement and terminal benefit legislation that applies to all factories, mines, oilfields, plantations, ports, shops, and commercial establishments employing 10 or more persons on any day of the preceding 12 months.

Under Section 4(1), gratuity is payable to an employee upon separation (resignation, retirement, superannuation, or termination) after rendering continuous service for not less than five years. However, the 5-year condition is entirely waived if employment terminates due to death or permanent disablement.

2. The 4 Years 240 Days Rule (Section 2A Precedent)

One of the most frequently contested legal questions is whether an employee who completes 4 years and a few months qualifies for gratuity.

            Judicial Precedent (Section 2A): In landmark judgments delivered by the Madras High Court (Mettur Beardsell Ltd.) and the Karnataka High Court, courts established that under Section 2A(2)(a)(ii), if an employee works for at least 240 working days in the 5th year (or 190 days in mining/6-day week setups), they are deemed to have completed "continuous service" for that year, making them legally eligible for gratuity upon completing 4 years and 240 days.
          

3. The 15/26 Formula & 6-Month Rounding Rule

For establishments covered under the Act, gratuity is computed at the rate of 15 days' wages based on the last drawn Basic Salary + Dearness Allowance (DA) for each completed year of service:

Gratuity = (15 × Last Drawn Monthly Basic + DA × Completed Years of Service) / 26

Under the Supreme Court ruling in Digvijay Woollen Mills, the divisor is 26 because a month is legally reckoned as having 26 working days (excluding 4 weekly off days).

The 6-Month Round-Up Rule: If service tenure exceeds six months in the final fraction year (e.g. 6 years and 7 months), it rounds up to the next integer year (7 completed years).

4. ₹20 Lakh Tax Exemption Ceiling (Section 10(10))

Under Section 10(10) of the Income Tax Act 1961, statutory gratuity received by private-sector non-government employees is exempt from income tax up to a cumulative lifetime ceiling of ₹20,00,000 (Twenty Lakh Rupees). Any gratuity amount received in excess of ₹20 Lakh is taxable under the head "Income from Salaries".

5. Can Gratuity Be Forfeited? (Section 4(6) Limits)

An employer cannot withhold or forfeit gratuity arbitrarily for simple breach of contract or notice period disputes. Under Section 4(6), forfeiture is permitted only in two narrow statutory exceptions:

Partial Forfeiture: To the exact extent of damage or loss caused to employer property due to willful omission or negligence.
Complete Forfeiture: If employment is terminated for riotous, disorderly conduct, violence, or an act constituting an offense involving moral turpitude committed in the course of employment.

6. Form I Application & Non-Payment Interest (10% p.a.)

An eligible employee must submit an application for gratuity under Form I within 30 days of exit. Under Section 7(3A), the employer must disburse the gratuity amount within 30 days from the date it becomes payable. If not paid within 30 days, the employer is legally liable to pay simple interest at 10% per annum from the due date until actual payment.