Can You Forfeit Gratuity for Misconduct? The Three Grounds, the Termination Order and the Limits
Only in narrow cases. Under section 53(6) of the Code on Social Security, 2020, gratuity can be forfeited only if the employee's service is terminated for causing damage to your property (and only up to the loss), for riotous, disorderly or violent conduct, or for an offence involving moral turpitude committed in the course of employment.
An employee is dismissed for misconduct and the first instinct is to stop the gratuity. That instinct is often wrong. The Code on Social Security, 2020 allows forfeiture only on specific grounds, only after termination, and in one case only up to the loss caused. This post sets out what you can withhold, how to do it, and what happens if you get it wrong. For the basics first, see what gratuity covers.
The rule: section 53(6)
Section 53(6) of the Code on Social Security, 2020 carries over section 4(6) of the Payment of Gratuity Act, 1972 almost word for word. It overrides the general right to gratuity in two situations.
| Ground | What must have happened | How much can be forfeited |
|---|---|---|
| 53(6)(a) Damage or loss | Service terminated for an act, wilful omission or negligence that caused damage, loss or destruction of the employer's property | Only to the extent of the damage or loss caused |
| 53(6)(b)(i) Riotous or violent conduct | Service terminated for riotous or disorderly conduct or any other act of violence | Wholly or partially |
| 53(6)(b)(ii) Moral turpitude | Service terminated for an act that is an offence involving moral turpitude, committed in the course of employment | Wholly or partially |
Everything outside this table is not a ground. Poor performance, resigning without serving notice, joining a competitor, or general indiscipline does not allow forfeiture. In August 2025 the Calcutta High Court held that taking up employment with a rival is not moral turpitude.
Termination comes first
Every ground starts with the words "whose services have been terminated". So:
- ✓No termination, no forfeiture. If the employee resigns or retires while an enquiry is pending, you cannot forfeit under section 53(6). Complete the disciplinary process before the exit, or accept that full gratuity is payable.
- ✓The termination order should state the ground. Courts expect the employer to show that the misconduct proved in the enquiry is the same misconduct that fits the forfeiture ground. An order that only says "dismissed" is weak.
- ✓Forfeiture is a separate decision. Dismissal does not forfeit gratuity automatically. A separate, reasoned decision on forfeiture and its amount is needed.
Moral turpitude after Western Coal Fields
In Union Bank of India v. C.G. Ajay Babu (2018), the Supreme Court read the moral turpitude ground as needing a criminal conviction. In Western Coal Fields Ltd. v. Manohar Govinda Fulzele (2025 INSC 233), the Court moved away from that reading. Commentary on the judgment describes the current position as:
- ✓a criminal conviction is not required;
- ✓the disciplinary authority must decide whether the proven misconduct would, in normal circumstances, amount to an offence involving moral turpitude;
- ✓the authority has discretion to forfeit all or part of the gratuity, depending on gravity;
- ✓an FIR or an allegation alone is not enough; the misconduct must be proved in the enquiry.
Theft, fraud, forgery, bribery and embezzlement in the course of work are the usual examples. The offence must relate to the employment, not to private life.
The process that holds up
- Hold a proper domestic enquiry and record findings on each charge.
- Pass a termination order naming the misconduct proved.
- Issue a show-cause notice on forfeiture: the ground relied on and the amount proposed. High Courts have held that notice must come before the decision.
- Consider the reply and pass a reasoned order on the ground and the amount.
- For damage cases, attach the working of the loss: repair invoices, written-down value, insurance recovery.
- Pay any balance within the deadline below.
Payment of the balance
Section 56 of the Code requires the employer to work out the gratuity as soon as it becomes payable, give written notice of the amount to the employee and the competent authority, and arrange payment within 30 days. Late payment carries simple interest at a rate not exceeding the rate the Central Government notifies for repayment of long-term deposits. If the employee disputes the forfeiture, they can apply to the competent authority, and either side can appeal the authority's order within 60 days.
A worked example
A Nashik auto-parts maker dismisses a machine-shop supervisor after an enquiry finds that he ran a CNC machine with its safety interlock bypassed, against written instructions, and damaged the spindle.
- ✓Last drawn wages for gratuity: ₹39,000 a month
- ✓Completed years of service: 12
- ✓Gratuity: ₹39,000 × 15 ÷ 26 × 12
- ✓₹39,000 × 15 = ₹5,85,000
- ✓₹5,85,000 ÷ 26 = ₹22,500
- ✓₹22,500 × 12 = ₹2,70,000
- ✓Repair cost of the spindle, net of insurance: ₹85,000
This is a damage case under section 53(6)(a), so forfeiture is capped at the loss:
- ✓Forfeited: ₹85,000
- ✓Payable: ₹2,70,000 − ₹85,000 = ₹1,85,000, within 30 days of termination
If the enquiry had instead found that he stole and sold finished parts, the moral turpitude ground would apply and the company could forfeit up to the full ₹2,70,000, after notice and a reasoned order.
Frequently asked questions
Can we withhold gratuity until the employee returns a laptop?
Not as a forfeiture. Unreturned property is not a ground under section 53(6) unless service was terminated for causing that loss. Recover it through other lawful means and pay gratuity on time.
Does a resignation during an enquiry stop forfeiture?
Usually, yes. Forfeiture needs termination for the misconduct. Once a resignation takes effect, there is no termination order to rely on.
Do we need a police case for moral turpitude?
No conviction is needed after Western Coal Fields, but the misconduct must be proved in a fair enquiry, and an FIR on its own does not prove it.
Can the forfeited amount in a damage case exceed the loss?
No. Under section 53(6)(a), forfeiture is limited to the damage or loss caused.
Sources
- ✓Code on Social Security, 2020 (Gazette text, sections 53 and 56), Ministry of Labour and Employment
- ✓Section 53, Code on Social Security, 2020 (gratuity and forfeiture), AdvocateKhoj
- ✓Section 56, Code on Social Security, 2020 (determination and payment of gratuity), AdvocateKhoj
- ✓Full forfeiture of gratuity after the Western Coal Fields decision, Chambers and Partners
This is a summary, not legal advice. Before you forfeit any gratuity, have the enquiry record and order reviewed by a labour lawyer, and check the Code text on the Ministry of Labour and Employment website.
Written by
HR Manager, Airwix Technologies (Sleet)
Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.
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