Payment of Gratuity act 1972

Payment of Gratuity is a retirement benefit that is paid by an employer to an employee as a form of gratitude for the services rendered by the employee. It is governed by the Payment of Gratuity Act, 1972, which applies to every establishment, factory, mine, oilfield, plantation, port, railway company, shop or other establishments, where ten or more employees are employed, or were employed on any day of the preceding twelve months.

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Under the Payment of Gratuity Act, an employee who has completed five years of continuous service in an establishment is eligible for gratuity. The gratuity amount is calculated as 15 days’ wages for every completed year of service, subject to a maximum of Rs. 20 lakhs. Wages include basic salary, dearness allowance, and commission based on a fixed percentage of turnover achieved by the employee.

Purpose/Objective of Payment of Gratuity

  • To provide for a Scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railways or other establishments where 10 or more persons are employed on any day of the preceding 12 months.
  • Gratuity is a lump sum payment made by an employer to an employee in consideration of his past service when the employment is terminated or on retirement.
  • Gratuity is a statutory Right.

Applicability for Payment of Gratuity

  • Extends to the whole of India
  • The person employed on wages in an establishment as defined under the Payment of Gratuity Act 1972 to do any skilled, Semiskilled or unskilled, manual or supervisory, technical or clerical work.

Conditions of Payment of Gratuity

The employer is required to pay gratuity to the employee within 30 days from the date on which it becomes payable. If the gratuity is not paid within this period, the employer is liable to pay interest at a rate specified by the government from time to time.

Payable to an Employee

  • On the termination of his employment after he has rendered continuous service for not less than 5 years. Continuous service for not less than 5 years.
  • On his superannuation.
  • On his retirement or resignation
  • On his death or disablement due to accident or disease (5 years service is not necessary)

Gratuity Amount

  • The ceiling of gratuity amount for government employees under the Payment of Gratuity act 1972, has been raised from 10 lakhs t 20 lakhs.
  • For non-government employees it is Rs. 10 lakhs.
  • For every completed year of service, the employer shall pay gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned.
  • In case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days wages for each season.
  • The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable.
  • If not paid within the period stipulated above, the employer is liable to pay interest for the delayed payment.

Compulsory Insurance

Payment of gratuity amendment act 1987 provides provisions for compulsory insurance for employers’ liability for payment towards the gratuity from the life insurance corporation of India.

Constitutional Validity

The provision of a period of 5 years-service as a qualifying period in section 4(1.b) is one of the minimum service conditions to be eligible for gratuity and is constitutionally valid.

Bakshish Singh vs Darshan Engineering works

In this case, the employee claimed gratuity after resignation. However, the claim was resisted by the employer on the ground firstly that the employee was entitled to gratuity only till the date he reached his superannuation age which was 58 years and since he had not completed 5 years of service by the time he attained 58 years and since he had not completed 5 years of service by the time he attained 58 years of age, he was not entitled to gratuity.

The contentions were negative by the controlling authority by pointing out that section 4(1) provided for payment of gratuity to the employee on the termination of his employment after he has rendered continuous service of not less than five years on the occurrence of any of the three events viz.,

  1. On the employee reaching his superannuation age, or
  2. On his retirement or resignation, or
  3. On his death or disablement due to accident or disease.

In the case of the third event, the qualifying continuous service of five years is not necessary.

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Important Updates on Payment of Gratuity

The Parliament on 22nd March 2018 passed the amended payment of the Gratuity Bill, 2018. Important points are –

  • The Bill seeks to make formal sector workers eligible for tax-free ₹20 lakh gratuity in line with the implementation of the 7th Central pay commission.
  • The bill also envisages the amendment of the provisions relating to the calculation of continuous service for the purpose of gratuity in case of female employees who are on maternity leave from ‘twelve weeks’ to such period as may be notified by the central government from time to time.
  • Now, this act is also applicable to Jammu & Kashmir and Ladakh after the abrogation of Article 370.

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