Payment of Gratuity Act 1972

15/11/2020 0 By indiafreenotes

The Payment of Gratuity Act, 1972 is an act that provides a scheme for the payment of gratuity to employees working in railways, ports, factories, oilfields, plantations, mines, shops or other establishments and for matters connected therewith or incidental thereto.


In India, gratuity is a type of retirement benefit. It is a payment made with the intent of monetarily helping an employee after his or her retirement. It was held by the Supreme Court of India in Indian Hume Pipe Co Ltd v Its Workmen that the general principle underlying a gratuity scheme is that by service over a long period the employee is entitled to claim a certain amount as retirement benefit.

The Payment of Gratuity Act was passed by the Parliament of India on 21 August 1972 and it came in force from 16 September 1972.

Application and extent

The act applies to the whole of India. Including the two new Union territories earlier this law was not applicable for Jammu and Kashmir. The act applies to all factories, mines, oilfields, plantations, ports and railway companies. But in the case of shops or establishments, other than those stated before, it applies to those organisations with 10 or more persons are employed on any day of the preceding 12 months. Under Section 1(3-A), if in case of any shop and establishment to which the act applies, the number of employees reduces below 10, it shall continue to be governed by the act irrespective of the number of employees. Thus, no employer will be able to refuse gratuity under this act by reducing the number of employees. Under Section 2(e), nothing in this act applies to apprentices and persons who hold civil posts under the Central Government or State Governments and are subjected to any other act or rule other than this act.

Payment of gratuity: Eligibility and calculation

Under Section 4, payment of gratuity is mandatory. Gratuity shall be payable to an employee on termination of employment after he has rendered continuous service for not less than 5 years in a single organisation. The termination can be due to: Superannuation, Retirement or resignation, and Death or disablement due to accident or disease. As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or disablement. In such case mandatory gratuity is payable.

Gratuity is paid at a rate of 15 days’ wages for every completed year of service or part thereof in excess of six months. The wages here mean wages last drawn by the employee. The “15 days’ wages” will be calculated by dividing the last drawn wages by 26 and multiplying the result with 15. But under Section 4(3), the maximum gratuity that is payable is fixed at ₹20,00,000. Any gratuity amount paid in excess of ₹20,00,000 is taxable in the employee’s hands.

Gratuity is paid when an employee:

  • Is eligible for superannuation
  • Retires
  • Resigns
  • Passes away or is rendered disabled due to accident or illness (if an employee passes away, gratuity will be paid to the employee’s nominee).


The employer shall arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated.

If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate not exceeding the rate stipulated by the federal government.

Gratuity should be paid in cash, or if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.


The gratuity payable to an employee shall be wholly forfeited if:

  • The service of such employee has been terminated for his or her lawless or disorderly conduct or any other act of violence on his or her part; or
  • The service of such employee is terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him or her in the course of his or her employment.

In order to forfeit gratuity of an employee, there must be a termination order containing charges as established to the effect that the employee was guilty of any of the aforesaid misconducts. In one case, it has been held that in the absence of a termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.

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 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.


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.

In a landmark case of Y.K. Singla v. Punjab National Bank, the highest court of India, the Supreme Court had to decide whether an employee whose gratuity has been withheld under Regulation 46 of the Punjab National Bank (Employees) Pension Regulations is entitled to get interests because of the delay after the completion of the proceeding? The court held that even though the provisions of the 1995 Regulations, are silent on the issue of payment of interest, the appellant would be entitled to interest, on account of delayed payment under the Payment of Gratuity Act for the benefit of the employee.

The disputes arising between the employee and employer shall be referred to the controlling authority and proceeding for the resolution presided by the controlling authority shall be considered to be judicial proceeding. The controlling authority has the authority to enforce the presence of any person and examine his oath, production of relevant documents and issuing commissions for the examination of witnesses if required. After due inquiry and giving the parties a reasonable opportunity of being heard, the controlling authority may determine the matters and pass appropriate orders. The aggrieved party can apply for appeals to the government.

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.


Violation of the provisions of the Act shall entail certain penalties. They are:

For avoiding any payment, if someone makes a false representation or false statement shall be punishable with imprisonment for 6 months or fine up to Rs. 10,000 or both.

Failure to comply with the provisions of this Act shall be punishable for a minimum of 3 months which may extend upto 1 year or a fine of Rs. 10,000 which may extend upto 20,000.

Non-payment of gratuity under the Act will lead to offence and the employer shall be punishable with imprisonment for at least 6 months and which may extend upto 2 years unless the court provides for the sufficient reason for less payment.

Exemption of Employer from Liability

An employer if charged with any offence punishable under this Act, shall be exempted from any liability, if he provides sufficient reasons for his conduct of the act or some other person doing that act without his knowledge. The other person if found guilty will be charged with the same punishment as an employer shall be charged.

Cognizance of Offences

The court cannot take cognizance of the offences punishable under this Act unless the amount of gratuity to be paid has not been paid or recovered within 6 months from the expiry of the prescribed time. In such cases, the government shall authorise the controlling authority to make a complaint where the authority has to make a complaint to the metropolitan magistrate or judicial magistrate of first class within 15 days of the authorisation.

Protection of action taken in good faith

The controlling authority shall not be under any legal proceeding if the acts done by him is in good faith or under any rule or any order.

Protection of Gratuity

No exempted gratuity which is payable under this Act to the employee by the employer shall be liable to the attachment of any order or decree by any court.

Act to override other enactments

Since the Payment of Gratuity Act is complete in itself, therefore, this Act has an overriding effect on all provisions, regulations and statutes relating to gratuity. The landmark case for this provision is University Of Delhi vs Ram Prakash And Ors. which states that any provision which is more beneficial for the employees should be considered to be having overriding effect.

Power to make rules

The power to make rules in the Payment of Gratuity Act, 1927, shall rest with the appropriate government and declare by notification.

Validation of amendments made in this Act

The rules made has to be presented before both the houses of the parliament when in session. If both the houses are in conformity for the annulments or the modifications, then it shall be applicable immediately otherwise such modifications will have no effect.


The Payment of Gratuity Act, 1927, is a welfare statute provided for the welfare of the employees who are the backbone of any organisation, company or startups. The gratuity amount encourages the employee to work efficiently and improve productivity. Recently, by the Payment of Gratuity (Amendment) Act, 2018, the central government has tried to promote social welfare by providing leverage to the female employees who are on maternity leave from ‘twelve weeks’ to ‘twenty six weeks’.

However, the scope of this Act is limited to large scale companies or organisations and is not applicable to organisations where the number of employees is less than 10. Yet, the Act in its entirety is complete and therefore it overrides other Acts and statues in relation to gratuity. The only need of the hour is to change or modify the implementation of the Act as this Act is still not followed by many companies or corporations.

“Subject to Changes”