Under the gratuity framework, employees are generally eligible for gratuity after completing five years of continuous service with an organisation. However, court rulings over the years have offered varying interpretations of what constitutes completion of five years.
According to Munab Ali Beik, Head – Compliance Advisory at Core Integra, an Indian HR and regulatory compliance firm, employees who complete five years of continuous service are clearly eligible for gratuity, while those leaving earlier may face legal ambiguity depending on the circumstances.
One of the key issues relates to whether employees completing four years and 240 working days in the fifth year can be treated as having completed five years of service.
In the Mettur Beardsell case, the Madras High Court held that employees completing four years of continuous service along with 240 days in the fifth year would qualify for gratuity. The ruling interpreted 240 working days as equivalent to one year of continuous service for establishments operating six days a week.
However, the Karnataka High Court, in the Alvas Institute of Engineering and Technology case, held that employees resigning voluntarily must complete a full five years of continuous service to become eligible for gratuity benefits.
Beik said the differing rulings have resulted in varying interpretations of gratuity eligibility.
“Considering both judgments, there appears to be a contradiction between the two interpretations. Therefore, to be on the safer side, completion of five years of continuous service is advisable,” he said.
Tax and payroll advisory platforms have also highlighted the lack of uniformity in interpretation.
According to guidance published by ClearTax, employees completing four years and 240 days are “often deemed” eligible for gratuity based on judicial interpretation, though the Payment of Gratuity Act itself continues to prescribe five years of continuous service.
The Code on Social Security, 2020, defines one year of continuous service as 240 working days for establishments operating six days a week and 190 working days for establishments operating less than six days a week.
The framework also treats interruptions caused by sickness, accident, approved leave, lay-offs, strikes, lock-outs or cessation of work not attributable to the employee as part of continuous service.
Certain categories of employees may still receive gratuity without completing five years of service.
In the event of an employee’s death, gratuity is payable to the nominee or legal heir irrespective of the length of service completed. Employees engaged under fixed-term employment contracts may also become eligible for gratuity after completing one year of service for the contractual period served.
Gratuity is calculated using the employee’s wage, divided by 26, multiplied by 15 days’ wages and further multiplied by the number of years of service completed.
According to Beik, under the Code on Social Security, 2020, effective November 21, 2025, the basic wage or 50% of total remuneration, whichever is higher, will be considered for gratuity calculations.
For gratuity calculation, service periods below six months are ignored, while periods of six months or more are rounded up to the next year. For example, service of six years and five months is treated as six years, while six years and six months is counted as seven years.
