Payment of Gratuity Act, 1972
1. Historical Development
Before 1972, there was no uniform law for gratuity in India. Gratuity was given by
employers voluntarily or under industrial awards. The need for a comprehensive central
law was felt due to increasing disputes regarding gratuity payments.
- First Recommendation: The concept was emphasized by the Second Pay Commission.
- Judicial Support: In various judgments (e.g., Garment Cleaning Works v. Workmen),
gratuity was seen as a right of the employee.
- State Legislation: Some states like Kerala and West Bengal had their own laws before
the central act.
- Central Law: Finally, the Payment of Gratuity Act, 1972 was enacted to provide a
uniform and mandatory scheme.
2. Aim and Objective of the Act
- To provide monetary benefit to employees as a retirement benefit.
- To ensure financial security to employees after long service.
- To recognize and reward long and loyal service.
- To create a sense of economic stability among employees.
- To prevent exploitation and make gratuity legally enforceable.
3. Applicability of the Act
- Applies to:
- Every factory, mine, oilfield, plantation, port, railway company.
- Every shop or establishment with 10 or more employees.
- Any other establishment notified by the government.
- Once applicable, it continues to apply even if the number of employees falls below 10.
4. Provisions Relating to Payment of Gratuity
a) Eligibility (Section 4)
- Employee must have completed 5 years of continuous service.
- Exceptions: In case of death or disablement, 5-year service is not required.
b) Rate of Gratuity
- 15 days' wages for each completed year of service.
- Formula: Gratuity = (15 × last drawn salary × number of years of service) / 26
c) Maximum Limit
- As per recent amendments, the maximum gratuity amount is ₹20 lakhs.
d) Time of Payment
- Payable on retirement, resignation, death, or disablement.
- Within 30 days of becoming payable. Delay beyond 30 days attracts interest.
e) Nomination (Section 6)
- Employee must nominate a person for gratuity payment. Can be changed later.
5. Computation of Gratuity (Short Note)
Formula:
Gratuity = (15/26) × Last drawn salary × Completed years of service
Example: If salary = ₹26,000 and service = 20 years:
Gratuity = (15/26) × 26,000 × 20 = ₹3,00,000
Important points:
- 26 represents working days in a month.
- For employees in seasonal establishments, gratuity is calculated differently (7 days'
wages instead of 15).
6. Forfeiture of Gratuity (Short Note)
Gratuity can be forfeited fully or partially under the following conditions:
a) Partial Forfeiture:
- If the employee is terminated for willful omission or negligence causing damage or loss
to the employer.
- Forfeiture is to the extent of the loss caused.
b) Full Forfeiture:
- If the employee is terminated for:
- Riotous or disorderly conduct.
- Acts of violence.
- Any act involving moral turpitude during employment.
Note: Forfeiture must be justified and recorded properly by the employer.
7. Payment of Gratuity (Short Note)
- Gratuity is a statutory right under the Act.
- It is a terminal benefit, payable irrespective of whether the employer has a gratuity
scheme.
- Payable within 30 days from the date it becomes due.
- In case of delay, the employer is liable to pay interest.
8. Authorities Under the Act
- Controlling Authority: Appointed by the appropriate government.
- Has the power to enforce payment, inquire into disputes, and impose penalties.
9. When Claim is Not Maintainable
- If the employee has not completed 5 years of service (except in case of
death/disablement).
- If employment is terminated due to misconduct, involving loss or moral turpitude.
- If the claim is made after the limitation period and not condoned.
Conclusion
The Payment of Gratuity Act, 1972 is a landmark welfare legislation ensuring financial
dignity for employees after long service. It promotes industrial peace, employee
motivation, and economic justice in labor laws.
