Payment of Gratuity Act 1972- Eligibility, Calculation, Key Features

What is the Payment of Gratuity Act 1972

Payment of Gratuity is an Indian law that makes companies pay a one-time gratuity to retired employees or an employee who resigns after a minimum of 5 years of service. The law applies to all companies of at least 20 employees. The wages for the purpose of calculating gratuity are the average of the employee’s last 3 months’ wages, or the average of the employee’s wages for the last 10 months of service, whichever is higher.

Gratuity is payable within 30 days of the employee’s retirement or resignation, or within 30 days of the employee’s death, if the gratuity is payable to the employee’s nominee. The Payment of Gratuity Act, 1972 is a valuable benefit for employees, as it provides them with a financial cushion after they retire or resign from their jobs. The law also helps to ensure that employees are not left destitute after they leave the workforce.

Key Features of the Payment of Gratuity Act, 1972

1. The Act applies to all companies with 20 or more employees.
2. Employees must have completed at least 5 years of service to be eligible for gratuity.
3. The amount of gratuity is calculated as 15 days’ wages for each completed year of service, to a maximum of Rs. 10 lakhs.
4. Gratuity is payable within 30 days of the employee’s retirement or resignation or within 30 days of the employee’s death.
5. Employees can nominate a person to receive their gratuity in the event of their death.

If you are an employee with 5 or more years of service, you may be eligible for gratuity when you retire or resign from your job. You can find out more about your gratuity entitlement by contacting your employer or the Ministry of Labour and Employment.

Eligibility and Entitlement under the Payment of Gratuity Act 1972

Candidates can read here the eligibility and entitlement under the Payment of Gratuity Act 1972:

Eligibility– The Payment of Gratuity Act, 1972, states that an employee is eligible to get gratuity only after he or she has worked with an organization for at least five years. The employee stands to receive the gratuity amount on his or her superannuation, or at the time of retirement or resignation. To be eligible for gratuity under the Payment of Gratuity Act, 1972, an employee must meet the following criteria:

• The employee must be employed in an establishment that is covered by the Act.
• The employee must have completed at least 5 years of continuous service in the establishment.
• The employee must have been terminated from service due to retirement, superannuation, resignation, death, or disablement.

Entitlement- The amount of gratuity payable to an employee is calculated as follows:

• 15 days’ wages for each completed year of service, to a maximum of Rs. 10 lakhs.
• In the case of seasonal establishments, gratuity is payable at the rate of 7 days’ wages for each season.
  The wages for the purpose of calculating gratuity are the average of the employee’s last 3 months’ wages, or the average of the employee’s wages for the last 10 months of service, whichever is higher.

Calculation of Gratuity Benefits

Here is a step-by-step guide on how to calculate gratuity benefits:

• Calculate the average monthly salary of the employee.
• Multiply the average monthly salary by the number of completed years of service.
• Divide the product by 26.
• If the gratuity amount exceeds Rs. 10 lakhs, cap the amount at Rs. 10 lakhs.

Download PDF: Payment of Gratuity Act 1972 

Here is a table summarizing the calculation of gratuity benefits:

Payment of Gratuity Act 1972- Rights and Obligations of Employers and Employees

The Payment of Gratuity Act, 1972 is a law that provides for the payment of gratuity to employees who have completed at least five years of continuous service in an establishment. The Act sets out the rights and obligations of both employers and employees in relation to gratuity.

Rights of Employees- The following are the rights of employees under the Payment of Gratuity Act 1972:

• To be eligible for gratuity, an employee must have completed at least five years of continuous service in an establishment.
• The amount of gratuity payable to an employee is calculated as 15 days’ wages for each completed year of service, to a maximum of Rs. 10 lakhs.
• Gratuity must be paid to the employee within 30 days of the employee’s retirement or resignation, or within 30 days of the employee’s death.
• An employee can nominate a person to receive their gratuity in the event of their death.

Obligations of Employers- The following are the obligations of employers under the Payment of Gratuity Act 1972:

• To pay gratuity to eligible employees.
• To pay gratuity within 30 days of the employee’s retirement or resignation, or within 30 days of the employee’s death.
• To maintain a gratuity fund for the payment of gratuity to employees.
• To contribute to the gratuity fund on behalf of employees.
• If an employer fails to comply with the provisions of the Payment of Gratuity Act 1972, they may be liable to pay penalties.

Procedure for Claiming Gratuity Benefits

The procedure for claiming gratuity benefits under the Payment of Gratuity Act 1972 is as follows:

1. Submit an application for gratuity: The employee must submit an application for gratuity to the employer in Form F, which is available online or at the employer’s office. The application must be submitted within 30 days of the employee’s retirement or resignation, or within 30 days of the employee’s death.
2. Calculate the amount of gratuity: The employer will calculate the amount of gratuity payable to the employee based on the employee’s salary and length of service. The amount of gratuity is calculated as 15 days’ wages for each completed year of service, to a maximum of Rs. 10 lakhs.
3. Issue a Gratuity Payment Order: The employer will issue a gratuity payment order to the employee, which will specify the amount of gratuity payable and the date on which the gratuity is payable.
4. Collect the gratuity amount: The employee can collect the gratuity amount from the employer in cash or by cheque.

If the employer fails to pay the gratuity amount within 30 days of the employee’s retirement or resignation, or within 30 days of the employee’s death, the employee can file a claim with the Labour Commissioner. The Labour Commissioner can order the employer to pay the gratuity with interest.

Statutory Compliance and Penalties under the Payment of Gratuity Act 1972

• In case of a false statement or false representation to avoid any payment: Imprisonment for a term which may extend up to 6 months or fine which may extend up to INR. 10000 or both.
• In case of contravention of the provision of the Act: Imprisonment for a term which may extend up to 1 year or fine which may extend up to INR. 20000 or both.
• In case of non-payment of gratuity: Imprisonment for a term which may extend up to 2 years or fine which may extend up to INR. 20000 or both.
• In case of failure to pay the premium on compulsory insurance: a fine may extend up to INR. 10000 and INR. 1000 for each day during which the offenses continue.

Recent Amendments and Updates to the Payment of Gratuity Act 1972

Accordingly, the Government initiated the process for amendment to the Payment of Gratuity Act, 1972 to increase the maximum limit of gratuity to such amount as may be notified by the Central Government from time to time. Now, the Government has issued a notification specifying the maximum limit to Rs. 20 Lakh.

Exemptions under the Payment of Gratuity Act 1972

The Exemptions under Payment of Gratuity 1972 are provided below:

1. If Gratuity is received during the period of employment then NO exemption will be provided to any employee whether an employee of a government firm or others.

2. If Gratuity is provided after retirement to the employees of any government firm then it is FULLY EXEMPT for tax purposes.

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