The Payment of Gratuity Act, 1972
📘 The Payment of Gratuity Act, 1972
1. Introduction
The Payment of Gratuity Act, 1972 is a social security legislation enacted to provide a retirement benefit called gratuity to employees who have rendered continuous service for a specified period. Gratuity is a lump sum payment made by the employer to the employee as a token of gratitude for the services rendered upon termination of employment, retirement, resignation, or death.
2. Objective of the Act
To provide a statutory right to gratuity to employees.
To ensure financial security for employees after retirement or separation.
To regulate the payment of gratuity uniformly across various industries.
To protect the interests of employees and their families in case of the employee’s death during service.
3. Applicability
The Act applies to every factory, mine, oilfield, plantation, port, railway company, shop, or establishment employing 10 or more persons.
The Act covers employees employed on salary, wage, or other remuneration.
Applicable to both government and private sector employees, although some government employees may have different gratuity rules.
4. Key Definitions
Gratuity: A sum payable to an employee as a token of appreciation for services rendered.
Employee: A person employed on wages or salary for any work, skilled or unskilled.
Continuous service: Service without a break exceeding 6 months.
Employer: The owner or manager of the establishment.
5. Eligibility
An employee who has rendered continuous service for at least 5 years is eligible for gratuity.
Continuous service means uninterrupted service, with a permissible break not exceeding six months.
However, there is no minimum service period required in case of death or disablement.
6. Quantum of Gratuity
The gratuity payable is calculated as:
- Gratuity=Last drawn salary×15×Years of service26\text{Gratuity} = \frac{\text{Last drawn salary} \times 15 \times \text{Years of service}}{26}Gratuity=26Last drawn salary×15×Years of service
where,
Last drawn salary = Basic pay + Dearness Allowance
15 = Number of days’ wages (half-month)
26 = Number of working days in a month
The maximum limit of gratuity is fixed by the government and periodically revised (e.g., ₹20 lakh as per latest amendments).
7. When is Gratuity Payable?
On retirement,
On termination of employment after continuous service of five years or more,
On death or disablement due to accident or disease during service,
On resignation, if eligible,
On superannuation.
8. Payment Procedure
The employer must pay gratuity within 30 days from the date it becomes payable.
If delayed, interest is payable for the delayed period.
The employee or nominee can apply to the Controlling Authority for recovery of gratuity in case of default.
9. Penalties for Non-Compliance
Failure to pay gratuity attracts:
Fine up to ₹20,000,
Or imprisonment for up to one year,
Or both.
10. Important Case Law
Case 1: Randhir Singh v. Union of India (1982)
Issue: Whether an employee is entitled to gratuity even if dismissed or terminated for misconduct.
Held: The Supreme Court held that gratuity is a vested right once the employee completes continuous service of 5 years, and dismissal on misconduct does not deprive him of gratuity.
Principle: Gratuity is not a punitive measure; it is a social security benefit.
Case 2: Municipal Corporation of Delhi v. Female Workers (Muster Roll) (2000)
Issue: Whether daily wage or muster roll workers are eligible for gratuity.
Held: The Court held that workers who satisfy the eligibility criteria are entitled to gratuity even if employed on daily wages.
Principle: The Act’s benefit extends to all qualifying workers, not only salaried employees.
Case 3: Bhagat Ram v. Union of India (1997)
Issue: Whether gratuity can be paid to employees who resign before completing 5 years.
Held: The Court ruled that gratuity is payable only after 5 years of continuous service except in cases of death or disablement.
Principle: Minimum continuous service condition is mandatory for gratuity entitlement.
11. Nomination
Every employee is entitled to nominate a family member who will receive gratuity in case of the employee’s death.
The employer must maintain records of nominations.
12. Controlling Authority and Appeals
The Act provides for Controlling Authorities to resolve disputes regarding gratuity.
Aggrieved parties can appeal to the Appellate Authority.
13. Recent Amendments
The Payment of Gratuity (Amendment) Act, 2018 increased the maximum gratuity limit from ₹10 lakh to ₹20 lakh.
Provisions related to digital payment and timelines for payment have been strengthened.
14. Significance
Gratuity under the Act is a social security measure aimed at protecting employees financially post-retirement or separation.
It provides a mandatory and uniform system of retirement benefit.
Encourages employee retention and loyalty.
Reduces disputes over terminal benefits by laying clear rules.
15. Conclusion
The Payment of Gratuity Act, 1972 plays a crucial role in India’s labour welfare legislation, ensuring that employees receive a fair monetary benefit on termination or retirement. Judicial pronouncements have consistently upheld the right to gratuity as a fundamental social security right, emphasizing the employer’s responsibility to pay it irrespective of disputes about employment termination (unless otherwise stipulated by law).
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