An employee expects and deserves, as a matter of right, some reward when he retires after a long meritorious service. The enactment of the Payment of Gratuity Act, 1972 has fulfilled this expectation of an employee. This Act has came into existence since 16th Sept., 1972.

What is Gratuity?

Gratuity is a short of an award which an employer pays out of his Gratitude, to an employee for his long and meritorious services, at the time of his retirement, or termination of his services. Payment of Gratuity is however, compulsory for employers subject to Eligibility. (stated as below)

Under the Act an employee becomes, entitled to earn gratuity after putting in service of minimum five years. When an employee dies while in service his nominee or heirs are entitle to get gratuity even if the employee had put in less than 5 years service. The rate of gratuity is 15 days salary every year of service but the total amount of gratuity cannot exceed
Rs. 3,50,000/- ; recently from 24th May, 2010, Central Govt. by Gazette Notification enhanced the limit up to
Rs. 10,00,000/- (Rupees Ten lakh)


The Payment of Gratuity Act, 1972 has been passed with the object of providing a uniform scheme for payment of gratuity to industrial workers throughout the country.


1. Every factory (as defined in Factories Act), mine, oilfield, plantation, port and Railway company.

2. Every shop or establishment to which Shops & Establishment Act of a State applies in which 10 or more persons are employed at any time during the year and

3. Any establishment employing 10 or more persons as may be notified by the Central Government.

4. Once Act applies, it continues to apply even if employment strength falls below 10.

5. The Act also has been made applicable to :-

a) Motor Transport undertaking,

b) Clubs,

c) Inland Water Transport Establishments

d) Local Bodies and

e) Solicitors Officers.


1. Any employee has to render minimum five years’ of service.

2. At the time of retirement or resignation or on superannuation, an employee should have rendered continuous service of not less than five years.

3. In case of death or disablement, the gratuity is payable, even if he has not completed 5 years of service.

Notice of Opening, Change or Closure of an Establishment

An employer has to send a notice in Form A to the Controlling Authority of the area within 30 days of the Rules as becoming applicable. In addition to that, Form B is to be submitted within 30 days of any change in the name, address, employer or nature of business whereas an employer has to send Form C intending to close down the business at least 60 days before intended closure.

It is permissible to Opt for Better Gratuity Scheme

An employee can, no doubt opt for scheme other than the Payment of Gratuity Act, if it appears to be better, but on adoption of that, he has to abide by the Scheme in to. The Supreme Court has held that sub-section (5) of section 4 of the Payment of Gratuity Act does not contemplate that the employee would be at liberty to opt for better terms of the contract, by keeping option open in respect of a part of the statute. While reserving his right to opt for beneficial provisions of the statute, he has to opt for either of them and not the best of the terms of the statute as well as those of the contacts. He cannot have both, such a constructions would defeat the purpose for which sub-section (5) of section 4 has been enacted. Impugned judgment cannot sustain and is set aside.

What is Continuous Service ???

The term ‘complete year of service’ means continuous service for one year.

An employee is said to have rendered continuous service, if:–

a) He has been in uninterrupted service, including service interrupted by sickness, accident, absents from duty with or without leave, lay-off, strike, or lock-out or cessation of work not due to the employee’s fault.

Note:– if an employee having been superannuated is a re-employed by the employer without any break in service, he will be eligible for payment of service.

b) In case of mine or non-seasonal establishment working for less than 6 days in week, he has actually worked for at least 190 days (in Mine) during the period of 12 months or 95 days, during the preceding 6 months, he shall be deemed to have rendered continuous service for a period of one year or 6 months, respectively.

c) In case of any other non-seasonal establishment he has actually worked for at least 240 days during the preceding 12 months or 120 days during the preceding 6 months, he shall be deemed to be have rendered continuous service for a period of 1 year or 6 months, respectively.

d) In case of seasonal establishment, he has actually worked for at least 75% of the days on which the establishment was in operation.

Notes:- For this purpose an employee shall be deemed to have actually worked on a day on which :-

a) He has been laid off under an agreement or in accordance with standing orders;

b) He has been on leave with full wages, earned in the previous year;

c) He has been absent due to temporary, disablement caused by accident arising out of, and in the course of, his employment, and

d) In the case of female, she has been on maternity leave not exceeding 12 weeks.

Retrenched Employee entitled to get Gratuity

Retrenchment means termination of service and termination of service is covered by the definition of retirement under the Act. Retrenchment of an employee falls within the scope of section 4(1)(b) of the Act under which gratuity is payable to an employee on his retirement. Therefore the employee is entitled to get gratuity.


1. Gratuity is payable on the basis of all emoluments earned by the employee, i.e. basic wages plus Dearness Allowances / Special Allowances.

2. The quantum of gratuity is to be computed at the rate of 15 days wages (7 days wages in case of seasonal establishments) based on rate of wages last drawn by the employee concerned for every completed year of service or a part thereof exceeding 6 months.

3. The total amount of gratuity payable shall not exceed the prescribed limit i.e.
Rs. 10,00,000/- (after publication of notification).

4. In case where higher benefit of gratuity is available under any gratuity scheme of the Co. the employee will entitled to higher benefit.

Calculation of Gratuity

1. Gratuity = Monthly Salary / x 15 days x No. of 26 Wages Last Drawn years of service

2. Piece rated employee –

Daily wage is average (total wages x 15 days x No. ofdrawn in last 3 months preceding years of servicetermination)

No. of days worked

3. Seasonal employee – based on 7 days wages for each season.

4. Max. Gratuity payable under the Act is
Rs. 10,00,000/- (w.e.f. 24th May, 2010)

Q. Since the payment of gratuity is not a regular feature, as such, we face difficulty in calculation of gratuity. Kindly appraise the method of calculation of gratuity?

A Section 4 of the Payment of Gratuity Act, 1972 deals with calculation of gratuity, The Explanation to the Act inserted by Act No. 22 of 1987 (w.e.f. 1-2-1987) provides that the completion of continuous services of five years shall not be necessary where the termination of the employment of the employee is due to death or disablement.

Example: Mr. Jatin joined an establishment in January 1985 at
Rs. 5,000/- per month. His wages were raised to Rs. 15,000 per month in December, 2005. He retired on 31st December, 2005. The amount of gratuity payable to him shall be calculated as under:


Mr. Jatin retired on: =31-12-2005

x 15 x 20

Joined on : 1-1-1985

Total Service : 20 years

His last drawn monthly salary was
Rs. 15,000.

The gratuity for the period of 20 years

= 15 days wages x 20 monthly wages last drawn comprises 26 days.

Hence the calculation will result as follows



x 15

 (days per completed 26 year of service) x 20 yrs.

= Rs. 1,73,077.00 will be payable toward Gratuity to Mr. Jatin

Forfeiture of Gratuity

1. The employee may wholly or partially forfeit the gratuity payable to him if his services are terminated on account:-

a) For his riotous or disorderly conduct or any other act of violence on his part or

b) For any act which constitutes an offence involving moral turpitude.

Note: If a workman who was dismissed for assaulting another workman, in a factory, is not entitled to payment of any amount of gratuity.

2. The employee partly forfeits the gratuity payable to him if his services are terminated for any act, wilful omission or negligence, causing any damage or loss to, or destruction of, property belonging to the employer, to the extent of damage or loss caused.

Deduction of Gratuity – Not permissible

The Gratuity of an employee can be forfeited or withheld only when he/she is dismissed for the prescribed misconduct like wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer shall be forfeited to the extent of the damage or loss so caused or if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude. In one case, the Calcutta High Court has also held that even if a workman gives an undertaking for making deductions, the gratuity of an employee cannot be withheld.

Time Limit of Payment

The Employer should pay the gratuity within 30 days from the date it becomes payable or after such date along with simple interest @10% p.a. (or as notified from Government from time to time) on the amount of gratuity, unless the delay is on the part of payee.


Gratuity payable under the Act cannot be attached in execution of any decree or order of any civil, revenue or criminal court.

Note: If the employee is dead then the gratuity becomes payable to the heirs of the employee and the same becomes attachable in the hands of the employer as the employer is legally bound to pay the said gratuity to the legal heirs of the employee.

Penal provision

1. If any person, for the purpose of avoiding any payment to be made under the Act, knowingly makes or causes to be made any false statement or false representation he would be punished with imprisonment up to 6 months, or with fine up to
Rs. 10,000/- or, with both.

2. If any employer contravenes, or makes default in complying with any provisions of the Act or any rule or order made thereunder, he would be punished with imprisonment up to 1 year, or with fine up to
Rs. 20,000/- or with both.

Handy tips for Employer

1) It is advisable for the employer to obtain nomination from the employee in Form ‘F’.

2) Form G when employee acquired family later.

3) And any change of nomination to be submitted in Form H, in duplicate.

As it renders easy for the employer to disburse the gratuity amount. If he neglects to obtain nomination and employee dies without nomination, it is likely that the family members of the deceased employee may approach the employer with conflicting claims to the gratuity compelling the employer to be in dilemma and to resort to the legal processes.

Display of abstract of the Act

Every employer must display an abstract of the Act and the Rules made thereunder in English and in the language understood by the majority of the employees at a conspicuous place at or near the main entrance of the establishment.

Obligations of Employer

1) Pay gratuity to the employees as required by the provisions of the Act and the rules framed thereunder

2) Determine the gratuity as soon as it becomes payable, and give notice of the same to the employee concerned and the controlling authority. In case of dispute regarding the amount determined, the admitted amount of gratuity must be deposited with the Controlling Authority. If the latter decides that any more gratuity is due to the employees, the same must be deposited with him.

3) Obtain an insurance in the prescribed manner for his liability for payment of gratuity under the Act, or establish an approved gratuity fund in the prescribed manner.

Obligations of Employee

1) An employee eligible for payment of gratuity under the Act, or any person authorised in writing to act on his/her behalf, has to apply to the employer within such time and in such form as may be prescribed under the rules for payment of gratuity as soon as it becomes due.

2) Every employee, after completing one year of service, has to nominate members of his / her family who may receive gratuity in case of his / her death.

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