What's Brewing

Background
“Gratuity” is a lumpsum amount of money paid by employer to employee when he/ she leaves employment, in appreciation of service rendered over a period. 

Rules governing payment of gratuity are covered by Payment of Gratuity Act, 1972 [PG Act]. Besides public sector employers, this Act is also applicable to private sector employers from the moment they employ ten or more persons on any single day in a year. 

“Pension” is a monthly payment made by employer to a retired employee or his nominee, from the fund accumulated through contributions made by employee and/or employee during employee’s service period. Until 2004, Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 and the Employees’ Pension Scheme, 1995 created under this Act were the only two enactments that governed matters related to pension.  

In January 2004, central government launched the “National Pension System” [NPS] for central government employees as a voluntary savings platform for financial security in their post-retirement life. In 2009, NPS was opened up to all Indian citizens aged between 18 and 70 years. 

In 2013, The Pension Fund Regulatory and Development Authority Act [PFRDA Act] was enacted to establish the PFRDA as the apex statutory body for managing and executing NPS. Employees’ contributions under NPS are market-linked and have tax benefits, making it an innovative, attractive option for retirement savings. 

In 2021, a structured framework for payment of gratuity to central government servants [employees] under the NPS was established under “Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021” [Gratuity Rules], in order to ensure fair and equitable gratuity to them upon retirement or in the event of death. 

In March 2021, Department of Pension and Pensioners’ Welfare [DoPPW] of Finance Ministry notified the Central Civil Services (Implementation of National Pension System) Rules, 2021 [NPS Rules]. 

The latest 
In April 2025, DoPPW made several amendments to the Rules, to address certain ambiguities in the gratuity payment process and to provide better protection to the employees. These amendments are called “Central Civil Services (Payment of Gratuity under National Pension System) Amendment Rules, 2025” [Amendment]. 

In October 2025, in response to queries from the stakeholders, DoPPW has issued an Office Memorandum clarifying the eligibility rules for payment of gratuity to central government employees under the Rules [Clarification].  

Salient features in the Amendment include:

1. Types of Gratuity: The Gratuity Rules identified two types of Gratuity, namely:

• Retirement Gratuity – payable at the time of superannuation.
• Death Gratuity – payable to nominee(s) in event of death during employment.
  
  Amendment now includes a third category, namely:
• Residuary Gratuity – payable when employee leaves before completion of the eligible period of 5 years consequent to (i) deputation to another department or (ii) transfer to another location.

2. Limitations on Gratuity: Following limitations are imposed on the gratuity amount payable:

• When an employee who has retired with retirement gratuity paid or has been removed from service with compassionate gratuity paid is re-employed, no gratuity is payable for the re-employment period.
• A person employed in government after previously serving in an autonomous body or a public sector undertaking is eligible for gratuity, even if he has received gratuity from the autonomous body or public sector undertaking, provided the employment is with the permission of the body or undertaking.

3. Power of withholding Gratuity:

• While Gratuity Rules empowered only the President of India to withhold payment of gratuity to a retired employee who is under investigation for civil/criminal offenses during service, Amendment empowers appropriate appointing authority to order the withholding of gratuity payment.
• No appeal is allowed on the Presidential order of withholding the gratuity. 

4. Resignation: Under Gratuity Rules, a resignation entails forfeiture of past service unless the reason is to join another government department after proper permission. In the Amendment, such permission should be specifically entered in the ‘service book’ of the employee.  

5. Ceiling on Gratuity payable: The Gratuity Rules had fixed an upper limit of Rs.20 lakhs for the amount payable as gratuity on retirement or on death, the Amendment has enhanced this limit to Rs.25 lakhs.

6. Family Members: Under the Amendment, following categories have been added as employee’s family:     

• Mentally retarded or physically challenged brothers and stepbrothers of any age.
• Divorced sisters and stepsisters.

7. Persons to whom Gratuity is payable: Under the Amendment, if a Nominee dies before the employee dies, gratuity payable to Nominee is equally distributed among the ‘family members’ who are eligible and alive at the time of death of the employee.    

8. Eligibility for Payment of Gratuity: In its Clarification, DoPPW took reference to the Pension Rules and has excluded the following categories of employees from payment of Gratuity:                                                    

Railway servants; Casual & daily Wage employees; persons paid from Contingencies; members of All India Services; local recruits made by Consulates/Embassies outside India; contract appointees and those appointed under special terms and conditions. 

For full text of the Rules:
https://www.staffnews.in/wp-content/uploads/2025/04/CCS-NPS-Gratuity-Amendment-Rules-2025-262672.pdf