Payment of Gratuity Act, 1972

Gratuity is a monetary benefit plan given by the employer to the employee for rendering services continuously for five years or more. The significance of this legislation lies in gratuity as a compulsory statutory retirement benefit. Inclusion of gratuity scheme first in the Women Journalists (Conditions of Service) & Miscellaneous Provisions Act, 1955, followed by its inclusion in the Kerala Industrial Employees Payment of Gratuity Act, 1970 and the West Bengal Employees Payment of Gratuity Act, 1971, ultimately paved the way for formulating a central legislature governing all industries irrespective of states.  

Section 1 specifies that this Act applies to every 

  • factory, mine, oilfield, plantation, port and railway company;  
  • shop or establishment in which ten or more persons are employed, or were employed, on any day of the preceding twelve months. Once applied it will continue to apply even if the number of persons employed at any time afterwards falls below ten. 

Section 2 defines the terms used throughout this Act, such as, employee, retirement, continuous service, etc. that clarify the applicability of the Act. One of the key terms with respect to this Act is ‘Continuous Service’ which is defined in Section 2(A) as: Uninterrupted service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not to be treated as break in service), lay-off, strike, lock-out or cessation of work not due to fault of the employee.  

Section 3 gives power to the Government to appoint any officer as a controlling authority for the administration of this Act; Section 4 details the rules/processes for the payment of gratuity. The latter states that it is payable to an employee on the termination of their employment after they have rendered continuous service for not less than five years on their: 

  1. superannuation; [it refers to the employee attaining an age, that was fixed in the contract or conditions of service, when the employee shall vacate the employment
  1. retirement or resignation; 
  1. death or disablement due to accident or disease (five years pre-requisite not applicable in such cases). 

In case of death of the employee, gratuity payable to them is paid to their nominee or heirs (and in case of minor at the attainment of majority). 

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days wages based on the rate of wages last drawn by the employee concerned. For a monthly rated employee, the fifteen days wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen. 

Suppose an employee’s last drawn basic pay is Rs. 10,000 per month who has worked with the employer for 20 years and 7 months. In this case, using the formula above, gratuity will be calculated as:  

(10,000 X 21) X 15/26 = Rs. 1.21 lakh 

For a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment (overtime work wage shall not be taken into account). 

For those employed on a seasonal basis, the employer shall pay the gratuity at the rate of seven days wages for each season.  

The amount of gratuity payable to an employee shall not exceed Rs. 3,50,000 (three lakhs and fifty thousand rupees). 

Section 4 also makes it mandatory for every employer to obtain insurance from the Life Insurance Corporation of India for his liability of payment towards the gratuity under this Act. 

Section 5 gives the Government the power to exempt any establishment or employee from the operation of the provisions of this Act; Section 6 lists the nomination rules for the employee. 

Section 7 14 details other related governing rules. For details please refer the below link.