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PAYMENT OF GRATUITY ACT, 1972

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We all must have heard the term ‘gratuity’ which means “a sum of money that is paid to an employee at the
end of the service.” In simple terms, a Gratuity is a form of ‘Gratitude’ paid by the employer to his employee
for his/her services and commitment towards company.

Introduction
The Payment of Gratuity Act is a genre of various statutes like the Minimum Wages Act, Employment and Social
Policy, etc. which is an extension of labour laws and it lays down the minimum benefits to be provided to the
employees.
So, in order to be eligible for the payment of gratuity, the minimum term of employment must be 5 years. In
India, this is all governed by Payment of Gratuity Act, 1972
It is a social security enactment providing for the welfare benefits of the employees working in industries,
companies and organisations. The Act has been amended in 2018 (The Payment of Gratuity (Amendment) Act,
2018).

Applicability of the Act

1. Every factory (as defined in Factories Act), mine, oilfield, plantation, port and railway.
2. Every shop or establishment to which Shops & Establishment Act of a State applies in which 10 or more
persons are employed at any time during the year end.
3. Any establishment employing 10 or more persons as may be notified by the Central Government.
4. Once Act applies, it continues to apply even if employment strength falls below 10.

The Act doesn’t apply to central or state government employees and other employees covered by any other act
for Gratuity payment. The “Employee” under the Payment of Gratuity Act 1972 means any person employed
on wages for doing any type of work, including those hired in the managerial or administrative capacity. The
key consideration for gratuity payment is that the person should be employed on wages. Those employed as
apprentices are not eligible for gratuity.

Continuous Service
According to this Act, the continuous service means an uninterrupted service during the employment period.
An employee shall be said to be in continuous service even his/her service in interrupted by way-
1. sickness,
2. accident,
3. leave,
4. absence from duty without leave,
5. leave with full wage,
6. temporary disablement,
7. laid-off period,
8. Maternity leave: 26 weeks (The Payment of Gratuity (Amendment) Act, 2018), whether such uninterrupted
or interrupted service was rendered before or after the commencement of this Act.

In case of period of one year

Employee will be treated as he in continuous service, if he is employed by employer for the period of
• 190 days employment under the ground in mines, or in establishment which works less than 6 days in a
week.
• 240 days in case of other any establishments (factories, companies, etc.)

In case of period of 6 months

Employee will be treated as he in continuous service, if he is employed by employer for the period of
• 95 days employment under the ground in mines, or in establishment which works less than 6 days in a week.
• 120 days in case of other any establishments (factories, companies, etc.)
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In case of seasonal establishments

An employee of a seasonal establishment shall be deemed to be in continuous service if he has actually worked
for not less than 75% of the numbers of days on which the establishment was in operation during the 1 year or
6 months.

Seasonal Establishments in which, although work is carried on throughout the year, the number of employees
is regularly subject to seasonal fluctuations for reasons associated with the weather, their sales or their location.
For example, hotels and restaurants in health spas and holiday resorts, gravel and sand pits and stone quarries
are deemed to be seasonal establishments.

Controlling Authority
The controlling authority shall be appointed by the appropriate government for the proper administration of
this Act. The government may appoint different controlling authority for different areas also.

Payment of Gratuity
Gratuity shall be payable to an employee on the termination of his employment after he has rendered
continuous service for not less than 5years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease :
The completion of continuous service of 5 years shall not be necessary where the termination of the
employment of any employee is due to death or disablement:
A retired person is also entitled to gratuity amount along with his pension.
In the case of death or disablement by accident or disease, the employer is under obligation to pay the gratuity
amount to the employee’s nominee or the legal heir, as the case may be, irrespective of the number of years
continuous services has been rendered.
The Act also has a provision for the minors as a legal heir in which the controlling authority has to invest the
amount in such banks or other financial institutions for the benefit of the minor until he/she becomes a major.

Calculation of gratuity
[Sec 4 (2)]
Monthly salary
Gratuity = x 15/26 x Number of years of service
• Monthly salary= last month drawn salary by the employee.
• 26 = total number of working days in a month.
• 15 = number of days in half of the month.

Example for monthly salaried employees

Gratuity = (Basic + DA) x 15/26 x number of years.
Example: If an employee had joined a job on 01-08-2004 and retired or got his job terminated on 30-04-2018,
with last drawn basic Salary of Rs 30,000 and DA of Rs 13000, his Gratuity will be:
(Rs 30,000+Rs 13000) x 15/26 x 14 = Rs 3,47,307.70/-
Note: Here the employee has completed 14 years of service. The seven months of his first year (August 2005 to
March 2006) is to be counted as one year as it is more than six months of service.
Gratuity = Number of years * last drawn salary *15/26
For instance, if XYZ has been employed by a company for 20 years and received Rs. 25,000 as his most recent
basic plus DA amount,
For XYZ, the gratuity amount is equal to 20 * 25,000 * 15/26, or Rs. 2,88,461.54.

Example for seasonal employees

In the case of seasonal employees, 7 days wages for each season of service completed by the employee is
considered for calculation. Rest of the formula is same as monthly-rated employees.
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For example: If a seasonal employee retires after working from 2006 to 2016, working one season each year,
with Rs 11000 Basic and Rs 7000 DA, his gratuity will be
(Rs 11000+7000) ×7/26 × 11 = Rs 53,307.70/-
Note: Here the employee has worked for one season every year. Hence, the total season is 11
Further, the Act provides for the services rendered for at least 6 months where the gratuity amount will be
calculated at the rate of fifteen days wages based on the rate of wages last drawn by the employee concerned,
provided that the amount paid for the overtime work will not be considered.

Gratuity in case of death of an employee

Service tenure of the employee Gratuity payable upon the death
> a year 2 * basis salary of the employee
More than or equal to 1 year but less than 5 6 * basis salary of the employee
years
More than or equal to 5 years but less than 12 * basis salary of the employee
11 years
More than or equal to 11 years but less than 20 * basis salary of the employee
20 years
More than or equal to 20 years For each full six-month term, half of the base salary. It is
limited to a maximum of 33 times the basic salary, though.

Maximum limit for gratuity payable

According to the Payment of Gratuity (Amendment Act, 2018) the maximum amount of gratuity payable to an
employee has been extended to Rs. 20 Lakhs against the earlier limt of Rs. 10 Lakh which was set in 2010.
• Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any
award or agreement or contract with the employer.

Deduction of gratuity
[Sec 4(6) (a)]
The gratuity of an employee, whose services have been terminated for any act, 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.
[Sec 4(6) (b)] the gratuity payable to an employee [may be wholly or partially forfeited]
• If the services of such employee have been terminated for his riotous or disorderly conduct or any other act
of violence on his part, or
• if the services of such employee have been terminated for any act which constitutes an offence involving
moral turpitude, provided that such offence is committed by him in the course of his employment.
Payment of gratuity is not applicable to employee who has been dismissed from the service for the reason of
indiscipline or misconduct.

Compulsory Insurance
Section 4A of the Act provides for the compulsory insurance to every employer other than those belonging to
the Central Government or State Government through Life Insurance Corporation. However, those employers
are exempted from this provision who have an established and registered gratuity fund in their company. The
government may also make rules for the enforcement of this section as and when necessary. Violation of this
provision by anyone may lead to penalty.

Power to Exempt
The Act provides the power to exempt to the appropriate government by notification to declare any
establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted from gratuity if the
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government is of the opinion that the establishment has favourable benefits not less than what this Act has
been providing. The same law applies to any employee or class of employees.

Nomination
According to this Act, it is necessary for the employee to prescribe for the name/names of the nominee soon
after completing one year of service. In case of a family, the nominee should be one among the family members
of the employee and other nominees shall be void. Any alteration or fresh nomination must be conveyed by the
employee to the employer who shall keep the same in his safe custody.

Determination of the Amount of Gratuity

The person entitled to receive the gratuity amount shall send an application in writing to the employer. The
employer shall calculate the gratuity amount and provide notice in writing to the concerned employee and the
controlling authority. The payment should be made within 30 days from the date payable to the employee.
Failure of payment within the prescribed limit will result in payment of simple interests. However, if the delayed
payment is because of the employee then the employer is not entitled to pay the simple interests.

Inspectors Appointed for the Purpose of this Act and their Powers
The government may appoint an inspector or inspectors who are deemed to be a public servant under Section
21 of Indian Penal Code for the purpose of ascertaining whether any of the provisions of this Act are being
violated or not complied with and take necessary measures to ensure the fulfilment of all the provisions of this
Act.

Recovery of Gratuity
If the employer delays in the payment of gratuity amount under the prescribed time limit, then the controlling
authority shall issue the certificate to the collector on behalf of the aggrieved party and recover the amount
including the compound interest decided by the central government and pay the same to the person. However,
these provisions are under two conditions:
• The controlling authority should give the employer a reasonable opportunity to show the cause of such an
Act.
• The amount of interest to be paid should not exceed the amount of gratuity under this Act.

Penalties under the Payment of Gratuity Act

OFFENCE PENALTY

To avoid any payment, if someone Punishable with imprisonment for 6 months or a

makes a false representation or false fine up to Rs. 10,000 or both.
statement
Failure to comply with the provisions Punishable by a minimum of 3 months, which may
of this Act extend up to 1 year, or a fine of Rs. 10,000, which
may extend up to Rs. 20,000.
Non-payment of gratuity under the The employer shall be punishable with
Act will lead to an offence imprisonment for at least 6 months, which may
extend up to 2 years unless the court provides a
sufficient reason for less payment.

The Payment of Gratuity (Amendment) Act, 2018

Key Amendments
• The amendment has side tracked the ceiling limit of the maximum amount of gratuity payable i.e Rs.10 lakh
set in 2010. This upper cap prescribed by Section 4(3) of the Act, has been removed.
• Section 4(5) of the Act prescribes that if the terms of employment contract provide for a higher amount of
gratuity over and above the ceiling limit stated in the Act, then the employee will be entitled to such higher
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amount. This transition has been introduced for the implementation of the 7th Central Pay Commission,
whereby the ceiling of gratuity for Central Government employees has been enhanced from Rs. 10 lakhs to
Rs. 20 lakhs.
• Instead of mentioning and specifying the ceiling amount in Act, the amendment empowers the Central
Government to notify the ceiling proposed so that the limit can be revised from time to time keeping in view
the increase in wage and inflation, and future Pay Commissions.
• Introduced in relation to the period of maternity leave. The period of maternity leave for females in
continuous service was twelve weeks under section 2A of the earlier Act. The amendment has modified the
maternity leave period from 'twelve weeks' to 'twenty-six weeks 'in order to keep the Act in tune with the
recently amended Maternity Benefit Act. This also resolves calculation of continuous service for the
payment of gratuity to employees who are on maternity leave.

What are the gratuity rules?

Following are the gratuity rules in India:
1. Gratuity is payable by a company that has 10 or more employees on a single day in the previous 12 months.
Even if the number of employees reduces to below 10, the company will be liable to pay the gratuity as per
the Act.
2. Gratuity is payable only if employees serve the company for at least 5 yrs. However, this condition doesn’t
apply in situations like the employee’s death or disablement.
3. Calculation of the gratuity is covered under the act.
4. Generally, gratuity is paid after retirement. However, there are exceptions to this rule:
a. Employees can ask for gratuity while switching jobs, provided they have completed 5 yrs of service
in the company
b. On the passing of an employee while in service, an employer has to pay the gratuity to the nominee
or legal heir
c. If an employee becomes disabled due to a disease or an accident, they are entitled to gratuity
d. Employees opting for VRS are entitled to get gratuity
e. An employee terminated can claim gratuity but not in case of discontinuation, theft, fraud, rape,
assault or molestation
5. Gratuity paid to an employee’s legal heir or widow is exempted from tax.
6. Gratuity of up to Rs. 20 lakh paid by the organisation under the Payment of Gratuity Act, 1972, is exempt
from tax. The gratuity paid under central, state, and local governments are exempt from tax as per Gratuity
Rules 2021.
7. An employer is mandated to pay gratuity to their employees even when the company is under bankruptcy.
8. If a nominee is a minor, an Assistant Labour Commissioner will invest the gratuity in a term deposit offered
by a nationalised bank on their behalf in their name.
Gratuity payment rules in India
1. An eligible employee should apply for gratuity within 30 days from the payable date. In case of retirement
or superannuation, they should apply before one month
2. An employer cannot reject an application submitted after 30 days if it was for a valid reason
3. An employer must fill in the payment date and amount within 15 days of receiving the application. Gratuity
should be paid within 30 days of receiving the application
4. In case an employer rejects an application, they must mention the reason
5. An employer may request a witness or evidence if a nominee or a legal heir claims gratuity. They will accept
the claim from the date of producing the evidence
6. The modes of gratuity payment are cash, cheque or demand draft

Payment of Gratuity Act 1972 Rules for disputes

An employee, legal heir or a nominee can file a complaint to the Assistant Labour Commissioner in case:
• The gratuity payable is less than what an employee feels eligible to receive
• If an employer rejects the gratuity payment application
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• An employee fails to pay the gratuity or specify the payable amount to an eligible claimant within the
prescribed time

Latest developments regarding gratuity

For private-sector employees, the ceiling tax exemption of gratuity amount has been raised to Rs. 20 lakh from
Rs. 10 lakh. The same was implemented for central government employees after the implementation of the 7th
Central Pay Commission.

Income tax and gratuity

1. Gratuity received by public sector employees apart from statutory corporations is exempt from tax.
2. For employees getting gratuity from an employer not covered under the Payment of Gratuity Act, the least
of the below is exempted from the tax:
• Rs. 10 lakh
• Actual gratuity got by an employee
• Half-month salary of every year that an employee has completed
3. For employees getting gratuity from an employer covered by the Payment of Gratuity Act, the salary of 15
days as per the last drawn salary is exempt

Types of gratuity forms

1. Form I: to apply for gratuity payment
2. Form J: to be used by a nominee for gratuity payment application
3. Form K: to be used by a legal heir
4. Form F: to put in a nominee
5. Form G: to add in a fresh nominee
6. Form H: to modify the nomination
7. Form L: issued by the employer to the employee mentioning the date and the amount
8. Form M: issued by the employer to the employee mentioning the reason behind the rejection of gratuity
9. Form N: used by an employee to send an application to the labour commission
10. Form O: issued by the concerned authority requesting an appearance for a case hearing
11. Form P: summons issued by the concerned authority to be present for the case hearing

Important questions
What is the Gratuity Act?
The Payment of Gratuity Act, 1972, governs gratuity payments in India. The act lays down the rules of eligibility
for companies and employees, calculation of gratuity, application of gratuity claim, and more.

What can you do if gratuity is not paid?

You can send a legal notice to your employer to pay the gratuity amount. If you still don’t receive it, you can
approach the labour commissioner’s office.

How to add a nominee for gratuity?

Employees are required to fill in Form F when joining a company. This will allow them to nominate one or more
heirs for the gratuity.

Can a company pay more than the permissible limit as gratuity in India?
Yes. A company can pay more gratuity under ex-gratia or bonus.

What is the penalty for a delay in gratuity in India?

In case of delay in the payment of gratuity, the employer has to pay simple interest on the amount throughout
the period of delay.
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Can you get a gratuity if you are a contract employee in a company?

If you are a contract employee in a company, and the contract is separate from the entity, you are eligible to
receive gratuity from the contractor, not the company.

How is gratuity paid?

There are three modes of payment. Gratuity is paid in cash, cheque or demand draft.