Forfeiture of Gratuity- Is not Automatic on Dismissal of Service- Supreme Court


August 23, 2018

In this case, the Supreme Court while elucidating on the issue of forfeiture of gratuity on dismissal of service has stated that gratuity can be forfeited only if there is any loss to the Bank on account of the misconduct of the dismissed employee.

Case name: Union Bank of India & ors. v. C.G. Ajay Babu & anr.


The issue that fell for consideration before the Supreme Court was whether forfeiture of gratuity, under The Payment of Gratuity Act, 1972 (hereinafter referred to as ‘the Act’), is automatic on dismissal from service?

In the case, the respondent employee was dismissed subsequent to disciplinary proceedings against him. The Appellant Bank in the case on dismissal also forfeited gratuity.

Aggrieved by which, the respondent approached the High Court. The Division Bench of the High Court passed order in favour of the respondent employee holding that only if there is any loss to the Bank on account of the misconduct, then alone, the forfeiture is permissible to the extent of loss.

Aggrieved by the aforesaid, the Appellant Bank approached the Supreme Court.

Bench’s Verdict

The Supreme Court Bench in the case dismissed the Banks’ appeal and upheld the High Court’s order on the basis of the following observations:


  • The Supreme Court while arriving at its decision made reference to the bipartite settlement dated 19.08.1966 prevailing in the Bank and the clause dealing with the forfeiture of gratuity which states that “There will be no forfeiture of gratuity for dismissal on account of misconduct except in cases where such misconduct causes financial loss to the bank and in that case to that extent only.
  • In view of the aforesaid, the Court noted that the settlement provides for forfeiture only if there is a loss caused on account of misconduct leading to dismissal. With reference to the facts of the instant case, the Court was of the view that there was no case for the Bank that the misconduct of the respondent-employee had caused any financial loss to the Bank, and therefore, forfeiture of gratuity under Section 4 of the Payment of Gratuity Act could not be resorted to.



  • While arriving at its decision, the Supreme Court also made reference to its judgment in the case of Jaswant Singh Gill v. Bharat Coking Coal Limited and others, wherein it was held by this Court that forfeiture of gratuity either wholly or partially is permissible only in the event that the termination is on account of riotous or disorderly conduct or any other act of violence or on account of an act constituting an offence involving moral turpitude when he is convicted.


In view of the aforesaid, the Supreme Court held that forfeiture of gratuity is not automatic on dismissal from service; it is subject to sub-Sections (5) and (6) of Section 4 of The Payment of Gratuity Act, 1972.

The entire case can be accessed here.