The Payment of Gratuity Act, 1972, gives employees a statutory right to gratuity upon meeting service conditions. It specifies who is eligible, how gratuity is calculated and when it must be paid. The Act also outlines employer compliance duties and includes amendments that expand coverage and reinforce timely payment, ensuring both employee protection and legal accountability for organisations.
Key rules under the Payment of Gratuity Act 1972
The Act specifies when gratuity is payable, how it is calculated and the conditions under which it can be withheld. These rules guide both employee benefits and employer responsibilities.
- Applicability rule: The Act applies to establishments with 10 or more employees. Once applicable, it continues even if the number falls below the threshold. It covers all employees, managerial and non-managerial, excluding apprentices, if they meet the conditions.
- Eligibility rule: Employees become eligible after five years of continuous service, except in cases of death or permanent disability. Continuous service includes sick leave, authorised leave, layoffs, accident-related absences or lockouts not caused by employee misconduct. Employees who complete 240 days of service in the fifth year are also eligible.
- Payment rule: Gratuity is payable upon resignation, retirement, superannuation or termination, subject to eligibility.
- Calculation rule: Gratuity is calculated using the statutory formula based on the last drawn salary and years of service.
- Forfeiture rule: Gratuity may be partially or fully forfeited for misconduct, including damage to property or offences involving moral turpitude.
Once an organisation is covered under the Act, it must determine which employees qualify for gratuity based on service conditions.
Key updates and amendments to the Payment of Gratuity Act 1972
The Act has been amended over time to reflect evolving employment practices and strengthen employee benefits. Key updates include:
- Increase in gratuity limit: The statutory gratuity limit has risen from ₹10 lakh to ₹20 lakh, allowing employees to receive higher payouts for long-term service.
- Recognition of fixed-term employees: Labour reforms now include fixed-term employees for gratuity benefits. They are eligible even if they have not completed 5 years of service, provided they complete their contractual tenure.
- Reinforcement of employee rights: Gratuity is a statutory benefit, and employers must pay it within the prescribed period, increasing legal accountability.
- Judicial interpretation of eligibility: Employees who complete 240 days of service in the fifth year are treated as having completed five years, reducing disputes over partial-year service.
- Inclusion of maternity leave: Maternity leave is treated as continuous service under legal interpretation and in alignment with the Maternity Benefit (Amendment) Act, 2017, ensuring uninterrupted service calculation.
How is gratuity calculated under the act?
The Payment of Gratuity Act, 1972, provides a standard formula for calculating gratuity:
Gratuity = (Last drawn salary × 15 × years of service) ÷ 26
Note: The last drawn salary includes basic salary plus dearness allowance (DA). The factor 15 represents 15 days’ salary for each completed year of service, and 26 reflects the number of working days in a month.
Example: If the last drawn salary is ₹40,000 and the employee has worked for 10 years:
(₹40,000 × 15 × 10) ÷ 26 ≈ ₹2,30,769
Employees who work more than six months in a year are considered to have completed a full year. The maximum gratuity limit under the Act is ₹20 lakh.
Compliance under the Payment of Gratuity Act, 1972
Employers must comply with specific requirements under the Act to ensure accurate and timely gratuity payments and avoid legal or financial consequences. These include:
- Verifying employee eligibility using accurate service records to prevent disputes.
- Calculating gratuity strictly according to the statutory formula to avoid underpayment or overpayment.
- Issuing a written notice specifying the gratuity amount (typically in Form L) within the prescribed time.
- Making payment within 30 days from the due date to prevent interest liability.
- Maintaining proper documentation for audit, verification and legal compliance.
- Filing or responding to claims before the controlling authority in case of disputes within the prescribed timelines.
Note: Delayed payments beyond the set period may attract interest unless caused by authorised circumstances.
Final Remarks
The Payment of Gratuity Act 1972 ensures employees receive gratuity benefits while defining clear responsibilities for employers. Following the rules, amendments and compliance requirements helps businesses avoid disputes, meet legal obligations and maintain smooth operations.
With accurate records and calculations, businesses can confidently manage gratuity payments. TallyPrime helps track service history, automatically compute gratuity and maintain compliance effortlessly.
