The Payment of Gratuity Act, 1972, is a key piece of legislation in India that provides a financial benefit to employees in recognition of their service. This benefit is known as gratuity, and it is payable to employees upon retirement, resignation, death, or disablement due to accident or disease, provided certain conditions are met.
Objectives of the Payment of Gratuity Act, 1972
The primary objectives of the Act are to:
- Provide a statutory right to gratuity payment for employees.
- Ensure social security by providing financial support to employees post-employment.
- Recognize the long-term service of employees to their employers.
Applicability
The Act applies to:
- Factories, mines, oilfields, plantations, ports, railway companies.
- Shops and establishments employing 10 or more employees.
- Other establishments or classes of establishments notified by the Central Government.
Once the Act applies to an establishment, it continues to be governed by the Act even if the number of employees falls below 10.
Eligibility for Gratuity
An employee is eligible to receive gratuity if they:
- Have completed at least five years of continuous service with the same employer. This condition is not required if the termination of employment is due to death or disablement.
- Have retired or resigned from their job.
- Have suffered from death or disablement due to accident or disease.
Calculation of Gratuity
Gratuity is calculated based on the last drawn salary and the number of years of service. The formula for calculating gratuity is as follows:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service ) ÷ 26
- Last Drawn Salary: This includes basic salary and dearness allowance.
- Number of Years of Service: The service period is rounded off to the nearest full year. For instance, if an employee has completed 5 years and 7 months, it is considered as 6 years.
- 15 Days’ Salary: Represents 15 days’ salary for each completed year of service.
- 26 Days: The number of working days in a month for the purpose of calculation.
Example:
If an employee’s last drawn basic salary plus dearness allowance is Rs. 20,000, and they have completed 10 years and 8 months of service, the gratuity would be calculated as follows:
Gratuity = (20,000 × 15 × 11) ÷ 26 = Rs.1,26,923/-
Maximum Limit
As per the latest amendments, the maximum amount of gratuity payable under the Act is Rs. 20 lakhs. This limit is subject to change as per government notifications.
Payment of Gratuity:
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Time of Payment:
Gratuity should be paid within 30 days from the date it becomes due.
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Application by Employee:
An application in Form I (or similar) should be submitted by the employee to the employer.
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Employer’s Responsibility:
The employer is responsible for determining the amount of gratuity and informing the employee in writing. Payment should be made either directly to the employee or their nominee/beneficiary.
Forfeiture of Gratuity:
Gratuity can be wholly or partially forfeited if the employee:
- Has been terminated for disorderly conduct or any act of violence or offence involving moral turpitude.
- Causes willful damage or loss to the property of the employer.
Authorities and Dispute Resolution
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Controlling Authority:
The appropriate government appoints controlling authorities for adjudicating disputes regarding the payment of gratuity.
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Application to Controlling Authority:
Employees or their nominees can apply to the controlling authority if gratuity is not paid.
- Appeal:
Any person aggrieved by the decision of the controlling authority can appeal to the appropriate government within 60 days.
Penalties:
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Failure to Pay Gratuity:
Employers who fail to pay gratuity can be fined and/or imprisoned. The fine can extend up to Rs. 20,000, and imprisonment can extend up to one year.
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Contravention of Rules:
Contravention of any provisions of the Act or rules made thereunder can attract penalties, including fines and imprisonment.
Recent Amendments
The Payment of Gratuity (Amendment) Act, 2018 was introduced to align gratuity provisions with evolving economic conditions, wage structures, and labor welfare policies. The amendment primarily focused on improving the benefits for employees in organized sectors, particularly women and workers in both public and private establishments covered under the Act. Gratuity, being a statutory retirement benefit, required revision in light of increased wages and extended maternity benefits granted under other labor laws.
A significant change brought by the 2018 amendment was the enhancement of the ceiling limit of gratuity. Earlier, the maximum gratuity payable to employees was ₹10 lakh. Post-amendment, this ceiling was raised to ₹20 lakh, ensuring higher retirement benefits for workers. Another crucial change was empowering the Central Government to notify the ceiling amount of gratuity through executive orders, making future revisions quicker and more flexible without requiring a full amendment in Parliament.
The amendment also synchronized the Act with the Maternity Benefit (Amendment) Act, 2017, ensuring that the continuous service period for gratuity eligibility included the revised maternity leave of 26 weeks instead of the earlier 12 weeks. This step particularly supported women employees by safeguarding their gratuity rights during extended maternity leave.