Payment of Gratuity Act, 1972

What is Gratuity?

Gratuity is a monetary benefit paid by an employer as one of the retirement benefits to the employees who have rendered continuous service for at least five years in the organization. In India, the provisions of gratuity are governed by the Payment of Gratuity Act, 1972.

Applicability 

The Payment of Gratuity Act, 1972 applies to employees engaged in factories, oilfields, mines, railway companies, plantations, ports, shops or other establishments with ten or more employees on any day in the last 12 months – is entitled to gratuity.

Furthermore, once the Act becomes applicable to an employer, even if the number of employees goes below 10, gratuity is still applicable. The amount of gratuity is fully paid by the employer.

Eligibility for Gratuity

To be eligible for gratuity under the Gratuity Act, an employee needs to have continuous five years of service with his employer, except when an employee passes away or is rendered disabled due to accident or illness, in that case, gratuity must be paid.

Gratuity is paid to an employee on his:

  • Superannuation;
  • Retirement;
  • Resignation; or
  • 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 and if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority).

Calculation of Gratuity Amount

In India, the amount of gratuity is assessed by the following method:

Gratuity Amount = Last Drawn Salary × No. of Years of Service × 15/26

  • 15/26 represents 15 days out of 26 working days in a month.
  • Last drawn salary = Dearness Allowance + Basic Salary
  • Years of Service are rounded off to the nearest full year. For example, if the employee has a total service of 15 years, 10 months, and 25 days, 16 years will be factored into the calculation.

Payment of Gratuity

The employer should pay the amount of gratuity within 30 days from the date of leaving the organization by an employee. If the amount of gratuity due under the section is not paid by the employer within the specified time, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate determined by the Central Government.

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

Forfeiture of Gratuity

The amount of gratuity due to an employee shall be wholly forfeited by the employer if:

  • The employee has been terminated for disorderly conduct or any other act of violence; or
  • The employee is terminated for any act involving moral turpitude, provided that such offence is committed in the course of his or her employment.
  • The employee causing wilful damage to the property of the employer, then up to the extent of damage gratuity will be forfeited.

Failure to pay Gratuity Amount

Payment of gratuity is a statutory requirement for every employer. If an employer fails to pay a gratuity amount to an employee, he shall be liable for punishment. If the employer fails to make payment of gratuity, he shall be punishable with imprisonment for a term which shall not be less than six months but which can reach two years.

Remedy Available 

If gratuity amount is not paid by the employer within the stipulated time to the employee, then the employee has the right to file a complaint to the Controlling Authority under the Payment of Gratuity Act within the area where the employer’s establishment is situated or where the employee was engaging at the time of termination. Moreover, the aggrieved employee can also approach Labour Courts to get relief and justice.