Analysis of Payment of Gratuity Act, 1972

Introduction
The Payment of Gratuity Act, 1972 is a social welfare legislation in the ambit of Labour laws of
India. The reason for the enactment is to secure an employees future. Such applicable employee
has toiled during his prime and receives salary for the work contributed by him. But there would
be a situation wherein he cannot work anymore, or has to retire. In such a situation can he bank
on his children to maintain himself? What if he has no children? How can he sustain? Hence the
Enactment. Gratuity therefore aides an employee when he is no more in a position to work not by
choice.
Gratuity is a part of salary. It comprises an essential part of Salary wherein employees benefit
through this scheme when they are no longer working.
So, Gratuity is one of the retirement benefits to an employee given by an employer, upon
Retirement or leaving a job. The entire amount of gratuity is exempted for Government
employees while for others exemption is as per section10(10) of Income Tax Act,1961.
Features of the Payment of Gratuity Act, 1972
a. The provisions of this Act have an overriding effect on all other Acts or instruments or
contracts so far as they are inconsistent with this Act. This concept can be seen in United
India Insurance Co. Ltd. Etc. v. H.K. Khatau
b. The Act covers a large denomination of people. It covers all Factories, shops with more
than 10 persons employed, etc.
c. The Act gives a statutory right of gratuity to all the employees which they can claim on
satisfying the continuous five years service.
d. The Act provides both executive and quasi-judicial machinery for matters pertaining to
nomination, determination and recovery of gratuity.
e. The executive machinery pertains to maintenance of records regarding opening, change
or closure of establishments, display of notices and maintenance of records by the
controlling authority. The quasi-judicial functions have been divided between the
employers and the Controlling Authority in as much as for payment of gratuity, the first
forum provided is an application to the employer. When the employer has declined or
avoided payment of gratuity, then an application is required to be made to the Controlling
Authority.
f. The machinery provided for recovery rests with the Controlling Authority.
The orders of the Controlling Authority for payment or determination of gratuity are applicable
before the appropriate government or the appellate authority.
Applicability of the Act
Employers of every factory, mine, oilfield, port, railways, plantation, shops, establishments or
educational Institution having 10 or more employees on any day in the preceding 12 months are
eligible to provide Gratuity for the benefit of the employees. Gratuity will remain entitled even if
the number of employees goes below 10, if the Act becomes applicable to the concerned
employer once at an earlier interval. This Act does not apply to Apprentices, Interns and persons
who hold civil post under the Central Government or State Government.
Section 2(e) of The Payment of Gratuity Act, 1972 reads as
‘(e) “employee” means any person (other than an apprentice) employed on wages,   4 [***] in
any establishment, factory, mine, oilfield, plantation, port, railway company or shop to do any
skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work, whether the
terms of such employment are express or implied,  5 [and whether or not such person is employed
in a managerial or administrative capacity, but does not include any such person who holds a
post under the Central Government or a State Government and is governed by any other Act or
by any rules providing for payment of gratuity].’
The applicability of the Act for other categories of employees was also sought for, by way of
Judicial remedies. Journalists, teachers, etc. have moved various High Courts in regard of the
same.
Section (3) of The Payment of Gratuity Act, 1972 reads as
‘It shall apply to—
(a)  every factory, mine, oilfield, plantation, port and railway company;
(b)  every shop or establishment within the meaning of any law for the time being in force in
relation to shops and establishments in a State, in which ten or more persons are employed, or
were employed, on any day of the preceding twelve months;
(c) such other establishments or class of establishments, in which ten or more employees are
employed, or were employed, on any day of the preceding twelve months, as the Central
Government may, by notification, specify in this behalf.’
Gratuity is payable only after five years of continuous service with the same employer have
completed. Post which, the employee will be eligible to receive the benefit of gratuity.
As stated in Sec 4(1), It is payable:
 On Superannuation (or) Retirement.
 On Resignation (or) Termination
 On death or Disablement due to accident or disease. (Even if service is of less than 5
years).
What is the treatment of Gratuity? Gratuity is taxable when it is so received under the head
‘Income from salary’. An employee can claim exemption maximum up to Rs. 10,00,000/-
However tax treatment varies according to various categories of employees.
Section 4(6) mentions that Employer has a right to forfeit gratuity in case employee is being
terminated due to wilful omission or negligence causing any damage or loss to, or destruction of,
property belonging to the employer shall be forfeited to the extent of the damage or loss so
caused.
Further, it shall be partially or wholly Forfeited if the employee was terminated for an act of
moral turpitude, misconduct or any other act of violence.
Furthermore, Employer is responsible to determine the amount of gratuity payable and pay the
same within 30 days. After completing one year of service, an employee is eligible to file
nomination in Form F. In case gratuity paid to the nominee or legal heir, continuous service of
five years is not applicable. A High court ruling states that an employee is eligible for gratuity
even if he completes 240 days in the fifth year. In case gratuity is received from more than one
employer during the previous year, maximum exemption allowed is up to Rs.10,00,000.

The Act speaks that no express provision required in the Contract between the employees and the
employers for making an employee being eligible to receive Gratuity.
In the case of United India Insurance Co. Ltd. Etc. v. H.K. Khatau and Ors. reported in 1984
Labour and Industrial Cases. It was held by the learned Justice Pendse speaking on behalf of the
Division Bench held that the employees covered under the Payment of Gratuity Act, 1972, were
entitled to Payment of Gratuity even though no provision was to be found in that respect in the
conditions of service between the employees and the employers. It was also held in this case that
United India Insurance Co. Ltd, was an establishment covered under the Act. There can be no
dispute in respect of propositions laid down in this case.

2009 Amendment
An Amendment in 2009 which inserted a Retrospective provision was challenged in the case of
Independent Schools' Federation Of India (Regd) v. Union Of India & Ors. The Payment of
Gratuity (Amendment) Act, 2009 has given retrospective effect to the provisions of Amendment
Act, 2009, deemed to have come into force w.e.f. the 3rd day of April, 1997, Section 13-A has
been newly inserted by section 3 of the Payment of Gratuity (Amendment) Act, 2009 in the
Payment of Gratuity Act, 1972, which has validated the Notification dated 3.4.1997 with
retrospective w.e.f. 3rd April, 1997. It was further held without doubt, that this amendment may
cause financial burden on the schools who will have to pay gratuity to all those teachers who
retired after 3.4.1997. However, that may not be a reason sufficient to set at naught the
retrospective operation of the amendment. Thus, due to lack of merit, the Writ Petition was
dismissed.

Conclusion
The Payment of Gratuity Act, 1972 is an important Legislation catering to the eligible employees
as a social security. The concerned employees need not worry about their as they are helped
economically with this scheme. However, implementation at the required time must be adhered
to. The quasi-judicial authorities in charge for making the benefit available should act in light of
the purpose of the Act, and diligently.
Ashika Haresh
CMR Law School