Payment of Gratuity Act 1972

Payment of Gratuity Act, 1972, is a significant legislation in India that ensures employees receive a gratuity upon retirement, resignation, death, or incapacitation due to an accident or illness. This Act was enacted to provide social security to employees post their employment period, fostering a sense of financial security and promoting long-term employment relationships.

Introduction and Objectives

The Payment of Gratuity Act, 1972, aims to provide a financial reward to employees for their service tenure. The primary objectives are:

• To provide a monetary benefit to employees on cessation of employment.
• To promote a sense of security and loyalty among employees by offering a terminal benefit.
• To ensure a systematic and standardized approach to the payment of gratuity.

Applicability

The Act applies to the following establishments:

• Factories: As defined under the Factories Act, 1948.
• Mines: As defined under the Mines Act, 1952.
• Oilfields: As defined under the Oilfields (Regulation and Development) Act, 1948.
• Plantations: As defined under the Plantations Labour Act, 1951.
• Ports: As defined under the Major Port Trusts Act, 1963.
• Railway Companies: As defined under the Indian Railways Act, 1890.
• Shops and Establishments: Employing ten or more persons on any day of the preceding twelve months.

Eligibility for Gratuity

To be eligible for gratuity under the Act, an employee must satisfy the following conditions:

• Continuous Service:

The employee must have rendered continuous service for at least five years. However, this condition is not necessary if the cessation of employment is due to death or disablement due to accident or disease.

• Type of Employment:

Employees covered under the Act include workers from the public and private sectors, excluding apprentices and persons holding civil posts under the Central Government and State Governments, who are governed by other gratuity rules.

Calculation of Gratuity

The gratuity amount is calculated based on the employee’s last drawn salary and the years of service rendered. The formula for calculating gratuity is:

Gratuity = (Last drawn salary) \times(15/26) \times(Number of years of service)

Where:

• Last drawn salary includes basic salary and dearness allowance.
• 15/26 represents 15 days of salary for each year of service, with the monthly salary divided by 26 (the number of working days in a month).

For example, if an employee’s last drawn salary is ₹30,000 per month and they have completed 20 years of service, the gratuity would be calculated as follows:

Gratuity = 30,000 × (15 / 26) × 20 ≈ ₹3,46,154

• Maximum Limit

The maximum limit for the gratuity payable under the Act is ₹20 lakh. However, the government may revise this limit from time to time.

Payment and Nomination

• Time Limit for Payment:

Gratuity should be paid within 30 days from the date it becomes payable. If there is a delay, the employer is liable to pay interest on the amount from the due date until the payment date.

• Nomination:

Employees are required to nominate a person or persons to receive their gratuity in the event of their death. The nomination can be changed anytime and must be submitted in a specified form.

Forfeiture of Gratuity

The Act provides for forfeiture of gratuity, either wholly or partially, under specific circumstances:

• Misconduct:

If the services of an employee have been terminated for any act, willful omission, or negligence causing damage or loss to the employer, the gratuity amount to the extent of the damage or loss can be forfeited.

• Riotous or Disorderly Conduct:

If the employee has been terminated for riotous or disorderly conduct or any other act of violence on their part, the gratuity can be wholly or partially forfeited.

• Moral Turpitude:

If the employee has been terminated for any act which constitutes an offense involving moral turpitude.

Grievance Redressal

If an employee or their nominee is not paid gratuity within the stipulated time or has any grievance related to the payment, they can make an application to the controlling authority (usually the Assistant Labour Commissioner) for resolution. The controlling authority has the power to hear and decide upon such cases.

Penalties for Non-Compliance

Employers who fail to comply with the provisions of the Act can face penalties, including:

• Fine: Up to ₹20,000.
• Imprisonment: Up to one year, or both.
• In case of non-payment: If an employer fails to pay the gratuity due to the employee, the controlling authority can direct payment along with simple interest at a specified rate.

Recent Amendments

Payment of Gratuity Act, 1972 has been amended several times to enhance its scope and benefits. Notable amendments are:

• Increase in Ceiling:

Gratuity ceiling was increased from ₹10 lakh to ₹20 lakh, aligning with the recommendations of the Seventh Pay Commission.

• Maternity Leave:

Maternity Benefit (Amendment) Act, 2017 increased the maternity leave to 26 weeks, which is also considered as continuous service for the purpose of calculating gratuity.