The Payment of Gratuity Act, 1972

In India, gratuity is a type of retirement benefit. It is a payment made with the intent of monetarily helping an employee after his or her retirement. It was held by the Supreme Court of India in Indian Hume Pipe Co Ltd v Its Workmen that the general principle underlying a gratuity scheme is that by service over a long period the employee is entitled to claim a certain amount as retirement benefit.[2]

The Payment of Gratuity Act was passed by the Parliament of India on 21 August 1972 and it came in force from 16 September 1972.

The act applies to the whole of India. Including the two new Union territories earlier this law was not applicable for Jammu and Kashmir. The act applies to all factories, mines, oilfields, plantations, ports and railway companies. But in the case of shops or establishments, other than those stated before, it applies to those organisations with 10 or more persons are employed on any day of the preceding 12 months. Under Section 1(3-A), if in case of any shop and establishment to which the act applies, the number of employee reduces below 10, it shall continue to be governed by the act irrespective of the number of employees. Thus, no employer will be able to refuse gratuity under this act by reducing the number of employees. Under Section 2(e), nothing in this act applies to apprentices and persons who hold civil posts under the Central Government or State Governments and are subjected to any other act or rule other than this act.[3]

Under Section 4, payment of gratuity is mandatory.[3] Gratuity shall be payable to an employee on termination of employment after he has rendered continuous service for not less than 5 years in a single organisation. The termination can be due to: Superannuation, Retirement or resignation, and Death or disablement due to accident or disease. As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or disablement. In such case mandatory gratuity is payable.[3]

Gratuity is paid at a rate of 15 days' wages for every completed year of service or part thereof in excess of six months. The wages here means wages last drawn by the employee. The "15 days' wages" will be calculated by dividing the last drawn wages by 26 and multiplying the result with 15. But under Section 4(3), the maximum gratuity that is payable is fixed at ₹20,00,000. Any gratuity amount paid in excess of ₹20,00,000 is taxable in the employee's hands. [4]

• The Payment of Gratuity Act, 1972 (PDF)