Class notes- Social Security in India

Lecture 4
Payment of Gratuity Act, 1972
Gratuity is the benefit that is received by an employee for the services he/she has
rendered to an organisation. 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. 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.)
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 = × 15 X Number of years of service
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• 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.

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.
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
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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.

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 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.
 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 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.

Conclusion
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.