The payment of Gratuity the Act 1972

Gratuity Benefits in India:

Payment of gratuity Act 1972 extends to the whole of India and is applicable to all factories, mines, oilfields, plantations, ports, railway companies etc.

Payment of Gratuity to employees a statutory duty on an employer.

The Payment of Gratuity Act was enacted in 1972 and applies to every shop or establishment

within the meaning of law for the time being in force in a State in which 10 or more persons are

employed or were employed on any day of the preceding 12 months. This Act provides a social

security cause with it and has been enacted from the word “gratuitous”. It is a form of gratitude

by the employer towards the employee who has served his organization for 5 years or more.

Gratuity shall be payable to an employee on termination of his employment after he has rendered

continuous service for not less than five years – (a) On his superannuation, or (b) On his

retirement, resignation, or (c) On his death or disablement due to accident or disease. An

employer will be liable to pay gratuity to the legal heirs/nominees of the deceased employee

even if the employee had not completed five years of service. For every completed year of

service or part thereof in excess of six months the employer shall pay the gratuity.

Continuous Service Means:

Section 2A of the Act provides the definition of “continuous service” which says that service

been uninterrupted for that period, interruption which may on account of sickness, accident,

leave, absence from duty without leave not being absence in respect of which an order treating

the absence as break in service has been passed. For the period of one year employee is deemed

to have rendered continuous service for 240 days.

Formula for the calculation of Gratuity:

Gratuity   = Last drawn month’s salary x 15days/26* Number of service years completed

Gratuity is calculated at 15 days wages last drawn by the employee for each completed year of

service. The monthly wage is divided by 26 and multiplied by 15. In computing a completed year

of service the period in excess of six months shall be taken as a full year.

For seasonal workers the formula for the calculation of gratuity is

Gratuity   = Last drawn month’s salary x 7days/26 x Number of service years completed

Maximum amount of gratuity payable under the Act is Rs. 10 lakhs w.e.f. January 1, 2007.

Forfeiture of Gratuity:

The gratuity payable to an employee shall be wholly forfeited for the following reason

mentioned:

i. If the service of such employee has been terminated for his riotous or disorderly conduct

or any other act of violence on his part; or

ii. If the service of such employee is terminated for any act which constitutes an offence

involving moral turpitude provided that such offence is committed by him in the course

of his employment. In order to forfeit gratuity of an employee, there must be termination

order containing charges as established to the effect that the employee was guilty of any

of the aforesaid misconducts. In one case, it has been held that in the absence of

termination order containing any of the above allegations, the gratuity of an employee

cannot be forfeited.

Duty of employer to pay gratuity and mode for payment:

Section 4 of the Act mentions the obligation on an employer of an establishment to consider the

case of each employee in the matter of payment of gratuity to him. The employer shall arrange to

pay the amount of gratuity within 30 days from the date it becomes payable to the person to

whom the gratuity is payable. If the amount of gratuity payable under the section is not paid by

the employer within the period specified, from the date on which the gratuity becomes payable

he will have to pay simple interest on it at the rate not exceeding the rate notified by the Central

Government from time to time.

The mode for the payment of gratuity is prescribed under section 9 of the Payment of Gratuity

Act, 1972. The said section contemplates that gratuity payable under the Act should be paid in

cash, or if so desired by the payee, by demand draft or bank cheque to the eligible employee,

nominee or legal heir, as the case may be.

Penalties:

 Imprisonment for 6 months or fine upto Rs. 10,000 fir avoiding to make payment by

making false statement or representation

 Imprisonment not less than 3 months and upto one year with fine on default in complying

with the provisions of Act or Rules