51 The Payment of Gratuity Act, 1972
This chapter takes up the Payment of Gratuity Act, 1972 — the statute that mandates a retirement / separation benefit equal to a portion of wages for each year of service. Gratuity is a deferred wage — earned over years of service but paid at separation.
51.1 Background and Object
Gratuity had been customary in many Indian establishments — a gratuitous payment recognising long service. The 1965 Tripartite Convention on gratuity recommended a statutory regime; the Payment of Gratuity Act, 1972 gave effect.
| Object | What it does |
|---|---|
| Statutory entitlement | Gratuity becomes a legal right after 5 years of service |
| Uniform formula | Standard calculation across employers |
| Compulsory payment | Cannot be denied or reduced by contract |
| Specified events | Payable on retirement, resignation, death, disablement |
51.2 Coverage — Section 1
The Act applies to:
- Every factory, mine, oilfield, plantation, port, railway company;
- Every shop or establishment in which 10 or more persons are employed;
- Such other establishments as may be notified by the central government.
The 10-employee threshold has been retained under the Code on Social Security, 2020.
51.3 Definitions — Section 2
| Section | Term | Meaning |
|---|---|---|
| 2(e) | Employee | Any person (other than apprentice) employed for wages, for any kind of work — manual, supervisory, technical, clerical |
| 2(s) | Wages | Basic + DA for the purpose of gratuity calculation; excludes bonus, commission, HRA, overtime |
| 2A | Continuous service | 240 days in a year (190 days for mines, factories with seasonal employment) |
51.4 Eligibility — Section 4
Gratuity is payable to an employee on:
- Superannuation (retirement at the age fixed for retirement);
- Retirement or resignation;
- Death or disablement due to accident or disease.
Eligibility requires continuous service of at least 5 years — except in the case of death or disablement, where the 5-year requirement does not apply.
The 2009 amendment also extended the Act to teachers in private schools — confirming the Supreme Court’s decision in Ahmedabad Pvt Primary Teachers’ Assn v. Administrative Officer (2004).
51.5 Quantum of Gratuity — Section 4(2)
The standard formula:
| Category | Formula |
|---|---|
| Employees covered by working day | Last drawn wages × 15 days × completed years of service ÷ 26 |
| Piece-rated employees | Last drawn wages × 15 days × completed years of service ÷ 26 (where wages = average of last 3 months) |
| Seasonal employments | 7 days’ wages × completed seasons of service |
The 15/26 ratio reflects the assumption of 26 working days in a month (one weekly day off).
51.5.1 The Maximum Limit
The 2018 amendment raised the maximum gratuity payable from ₹10 lakh to ₹20 lakh (in line with the Seventh Pay Commission recommendation for central government employees).
The Code on Social Security, 2020 retains the ₹20 lakh ceiling but allows central government to revise it by notification.
51.5.2 Continuous Service — Section 2A
For the 5-year qualification, continuous service means actual service, including periods of authorised leave, absence due to industrial action, etc. Specifically:
- For underground workers in mines: 190 days of work in the previous year amounts to continuous service for that year;
- For other workers: 240 days of work in the previous year.
A worker who completes 4 years and 240 days is considered to have completed 5 years for gratuity (Madras High Court — Mettur Beardsell Ltd v. Reg. Gratuity, 1998).
51.6 Payment of Gratuity — Sections 7 and 8
| Step | Provision |
|---|---|
| Employee’s application | Within 30 days of gratuity becoming payable; later applications also entertained |
| Employer’s payment | Within 30 days of becoming payable |
| Interest on delay | Simple interest at prescribed rate from the due date |
| Forfeiture | §4(6) — gratuity may be forfeited fully or partially in case of misconduct |
51.6.1 Forfeiture — Section 4(6)
Gratuity may be wholly or partially forfeited where the employee’s services are terminated for:
- Riotous or disorderly conduct, or any act of violence;
- Any act constituting an offence involving moral turpitude in the course of employment;
- Wilful damage or loss to property of the employer (forfeiture limited to extent of damage).
51.7 Compulsory Insurance — Section 4A
The 1987 amendment introduced compulsory insurance for the gratuity liability — every employer (other than central / state government) must obtain insurance from LIC or any other prescribed insurer. The provision aims to protect workers from employer insolvency.
51.9 Penalties — Section 9
| Section | Offence | Penalty |
|---|---|---|
| 9(1) | False statement / representation | Imprisonment up to 6 months or fine up to ₹10,000, or both |
| 9(2) | Failure to comply | Imprisonment 3 months to 1 year (extendable to 2 years) or fine ₹10,000 to ₹20,000 |
51.10 Position under the Code on Social Security, 2020
The Code on Social Security, 2020 has subsumed the Payment of Gratuity Act with three notable changes:
| Element | Gratuity Act 1972 | SS Code 2020 |
|---|---|---|
| Eligibility threshold | 5 years | 5 years generally; 1 year for working journalists; 3 years for fixed-term employees (pro-rata) |
| Maximum | ₹20 lakh (2018) | Continued; revisable |
| Calculation formula | 15/26 × wages × years | Retained |
| Insurance | Compulsory (1987) | Retained |
| Coverage | Establishments with 10+ | Retained |
| Penalties | Modest | Revised upward |
The most consequential change is pro-rata gratuity for fixed-term employees after 1 year — addressing the gap that had previously denied gratuity to short-tenure workers.
51.11 Tax Treatment
Gratuity is exempt from income tax up to ₹20 lakh (Section 10(10) of the Income Tax Act, 1961) — aligned with the statutory ceiling under the Gratuity Act.
51.12 Practice Questions
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- Payment of Gratuity Act, 1972 — statutory deferred wage; based on 1965 Tripartite Convention.
- Coverage: factories, mines, plantations, ports, railways, shops/establishments with 10+ employees.
- Eligibility: 5 years’ continuous service; waived for death / disablement.
- Continuous service: 240 days/year (190 for mines).
- Formula: Wages × 15 days × completed years ÷ 26.
- Maximum: ₹20 lakh (2018 amendment).
- Payment within 30 days of becoming payable.
- §4(6) forfeiture for moral turpitude, riotous conduct, wilful damage.
- §4A compulsory insurance from 1987.
- Tax-exempt up to ₹20 lakh.
- SS Code 2020: pro-rata for fixed-term employees after 1 year.