52 The Payment of Gratuity Act 1972: Object, Applicability, Five-Year Continuous Service, Calculation Formula (15 Days’ Wages × Years), Ceiling (Rs 20 Lakh), Forfeiture, Controlling Authority and the Code on Social Security 2020
52.1 A Long-Service Reward
Gratuity is a lump-sum payment by an employer to an employee on the cessation of long employment — a reward for continuous service. The Payment of Gratuity Act 1972, based on the Kerala and West Bengal state Acts of the 1960s, made gratuity a statutory entitlement for employees of factories, mines, plantations, ports, railways and other establishments. It is now subsumed within the Code on Social Security 2020.
52.2 1 · Object, Extent and Commencement
| Aspect | Detail |
|---|---|
| Year | 1972 (Act 39 of 1972) |
| Commencement | 16 September 1972 |
| Object | Compulsory gratuity for employees on cessation of long service |
| Extent | Whole of India |
| Successor | Code on Social Security 2020 |
52.3 2 · Applicability — Section 1
The Act applies to every:
- Factory, mine, oilfield, plantation, port, railway company.
- Shop or establishment employing 10 or more persons on any day in the preceding 12 months.
- Other establishments notified by the central government.
Section 1(3A) provides that once the Act becomes applicable to an establishment, it continues to apply even if the number of workers later falls below 10. NTA stems test this “irreversibility” rule.
52.4 3 · Key Definitions — Section 2
| Term | Section | Substance |
|---|---|---|
| Employee | 2(e) | Any person (other than apprentice) employed on wages — includes managerial / administrative staff (post-2009 amendment, no salary ceiling for eligibility) |
| Continuous service | 2(c) | Uninterrupted service — including periods of leave, absence due to sickness, lock-out, strike (not illegal), accident, lay-off |
| Wages | 2(s) | All emoluments earned including DA; excludes bonus, commission, HRA, OT |
| Completed year of service | 2(b) | Continuous service of one year |
52.4.1 Section 2A — Continuous Service Test
A worker is in “continuous service” for one year if he has worked under the employer for at least 240 days in the preceding 12 months (190 days in mines below ground or seasonal establishments).
52.5 4 · Eligibility — Section 4
| Situation | Service requirement |
|---|---|
| Superannuation (retirement at prescribed age) | 5 years’ continuous service |
| Resignation | 5 years |
| Death | Continuous service requirement waived — paid even if less than 5 years |
| Disablement due to accident or disease | Continuous service requirement waived |
The 5-year continuous service requirement is waived in cases of death or disablement. NTA stems frequently test this exception.
52.6 5 · Calculation Formula — Section 4(2)
Gratuity = (Last drawn monthly wages × 15 ÷ 26) × Completed years of service
For seasonal establishments: 7 days’ wages per season. For piece-rated employees: average daily wages over preceding 3 months.
The 15/26 convention treats every month as having 26 working days; 15 days’ wages = roughly half a month’s wage per year of service.
52.6.1 Rounding Rule
A fraction of a year exceeding six months counts as a completed year; less than six months is ignored.
52.7 6 · Statutory Ceiling
| Year | Ceiling |
|---|---|
| 1972 | Rs 20,000 |
| 1987 | Rs 50,000 |
| 1995 | Rs 1,00,000 |
| 1998 | Rs 2.5 lakh |
| 2010 | Rs 10 lakh |
| 2018 (current) | Rs 20 lakh |
The current ceiling is Rs 20 lakh (raised from Rs 10 lakh by the Payment of Gratuity (Amendment) Act 2018). The Code on Social Security 2020 retains this.
52.8 7 · Time-Limit and Payment — Sections 7-8
| Provision | Detail |
|---|---|
| Application by employee | Within 30 days of gratuity becoming payable |
| Payment by employer | Within 30 days of becoming payable |
| Interest on delay | Simple interest at prescribed rate (currently linked to RBI rate) |
52.9 8 · Forfeiture — Section 4(6)
Gratuity may be wholly or partially forfeited in case of:
- Termination for an act of wilful omission or negligence causing damage to employer’s property (forfeiture to extent of damage).
- Termination for riotous or disorderly conduct, or any act involving moral turpitude in the course of employment (wholly).
52.11 10 · Compulsory Insurance — Section 4A
Section 4A (inserted 1987) requires every employer to obtain insurance for liability to pay gratuity from LIC or any other approved insurer. Establishments with 500+ employees may establish an approved gratuity fund instead.
52.12 11 · Penalties — Section 9
- Avoidance of gratuity: imprisonment 6 months to 2 years or fine Rs 10,000 to Rs 20,000.
- False statement: imprisonment up to 6 months or fine up to Rs 10,000.
52.13 12 · Tax Position
Gratuity received by an employee is exempt from income tax under Section 10(10) of the Income-Tax Act 1961 up to the prescribed limit (currently Rs 20 lakh for non-government employees covered by the Act).
52.15 Practice Questions
The Payment of Gratuity Act was enacted in:
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The Act applies to shops / establishments with at least:
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The minimum continuous service for gratuity on superannuation is:
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The 5-year minimum is waived in case of:
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The gratuity formula is:
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The current statutory ceiling on gratuity is:
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Continuous service for one year requires work for at least:
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Gratuity must be paid within:
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Gratuity may be wholly forfeited on termination for:
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Compulsory insurance under Section 4A is from:
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Recovery of unpaid gratuity is as:
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For seasonal establishments, gratuity is:
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The 2018 amendment raised the ceiling from:
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Under the Code on Social Security 2020, fixed-term employees receive:
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A fractional year of service of more than how many months counts as a completed year?
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Gratuity is exempt from income tax under:
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Once the Act becomes applicable to an establishment, it:
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Disputes regarding gratuity are decided by:
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After the 2009 amendment, the Act applies to employees:
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The Payment of Gratuity Act 1972 is subsumed within:
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52.16 Quick Recall
- Payment of Gratuity Act 1972 — in force 16 September 1972; 10+ employees threshold; once applicable, always applicable.
- 5-year continuous service required for superannuation/resignation; waived on death/disablement.
- Section 2A continuous service test: 240 days general; 190 days below-ground / seasonal.
- Formula: 15/26 × last wages × completed years; 7 days/season for seasonal.
- Rounding: > 6 months = full year.
- Ceiling: Rs 20 lakh (2018); paid within 30 days; interest on delay.
- Forfeiture (Section 4(6)): wholly for riotous conduct/moral turpitude; partial for damage.
- Section 4A — compulsory insurance from LIC or approved insurer.
- Section 8 — recovery as arrears of land revenue.
- Section 10(10) IT Act — tax exemption up to ceiling.
- Code on Social Security 2020 — pro-rata gratuity for fixed-term employees without 5-year minimum.