Employment
Section 53 sets the gratuity formula, the five‑year service rule and the ₹20 lakh cap, meaning small firms must budget a predictable lump‑sum cost when staff leave or die.
Check your DPDP readiness — free More on the blogGratuity becomes payable when an employee’s service ends after at least five years of continuous work. The trigger events include retirement, resignation, superannuation, death, disablement, the expiry of a fixed‑term contract or any notified event. The rule mirrors earlier legislation but consolidates the conditions in one place, making compliance easier for businesses that track employee tenure.
The five‑year minimum is waived if the employment ends because of death, disablement or the natural expiry of a fixed‑term contract. For working journalists the threshold is reduced to three years. In those cases the gratuity is calculated on a pro‑rata basis, ensuring that even short‑term staff receive a statutory amount rather than nothing.
The statutory formula is fifteen days’ wages for each completed year of service. A part‑year that exceeds six months is treated as a full year. For monthly‑rated employees the monthly wage is divided by twenty‑six days, multiplied by fifteen, and then multiplied by the number of years. The result cannot exceed the notified cap of ₹20 lakh, although any contractual gratuity that is higher must still be honoured.
Employers may deduct gratuity only in two narrow situations. First, they can recover an amount equal to the damage the employee caused to the employer’s property, if that damage was the reason for termination. Second, the whole or part of the gratuity may be withheld if the employee was dismissed for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed during employment. Ordinary misconduct does not justify forfeiture. Missteps such as tardiness, insubordination or poor performance fall outside the statutory grounds, and any deduction would be unlawful. This restriction protects employees from arbitrary loss of a statutory benefit. If an employee dies, the gratuity passes to the nominated beneficiary or the legal heirs. For minor heirs the amount is not paid directly; instead it is deposited with the notified competent authority until the minor reaches adulthood, preventing premature disbursement. Employers often err by dividing the monthly wage by thirty instead of twenty‑six, which reduces the payable amount. Using the correct divisor ensures the calculation aligns with the law and avoids under‑payment claims. Section 53(5) preserves any more generous terms that may exist in an award, agreement or contract. Therefore, if a company has promised a higher gratuity than the statutory formula, it must honour that promise, even though the cap applies only to the statutory component.
Gratuity is payable without the five‑year minimum when employment ends because of death, disablement or the natural expiry of a fixed‑term contract. In those cases the amount is calculated on a pro‑rata basis for the actual period worked.
The calculation uses the formula (15 × last wages × years) ÷ 26. The monthly wage is divided by twenty‑six days, multiplied by fifteen for each completed year, and the total is capped at ₹20 lakh. A part‑year over six months counts as a full year.
Gratuity can be deducted only to the extent of damage the employee caused to the employer’s property, if that was the reason for termination, or it may be wholly or partly forfeited when the employee is dismissed for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed during employment.
Yes. Section 53(5) protects any better gratuity terms agreed in an award, contract or agreement. The statutory cap of ₹20 lakh applies only to the minimum amount; any contractual gratuity that exceeds this must still be paid.
Published 29 October 2026. Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this
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