Payment Of Gratuity Act 1972


Derived from a Latin word ‘Gratuitas’, the term Gratuity means a ‘Gift.’ In the industrial sector, gratuity is considered as a gift from the employers to their employees. Gratuity is a lump sum payment paid by an employer to the employee for his/her past services. Gratuity is a gesture to appreciate the efforts of a person towards the betterment, development and prosperity of an establishment. Considering gratuity as a social security, today it has become a statutory obligation on the part of employers.

Payment of Gratuity Act 1972 covers all the norms related to Gratuity. Gratuity Act is applicable to employees engaged in mines, factories, oilfields, ports, plantations, shops, railway companies or other establishments and for matters connected therewith or incidental thereto.

What is Payment of Gratuity Act 1972?

Payment of Gratuity Act, 1972 was enacted by the Ministry of Labour and Employment on 21st August 1972. Further, it was enforced from 16th September 1972.  According to the Payment of Gratuity Act 1972, an employee is eligible to receive gratuity amount if he/she has rendered ongoing  worked  for not at least 5 years towards an organisation.

The gratuity becomes due to an employee on his (a) superannuation or (b) on his retirement or resignation (c) On his death or disablement due to accident/disease. The rules of Gratuity Act suggest that an employer has to arrange to pay the amount of gratuity within thirty days from the date gratuity becomes payable to the person.

The gratuity becomes due to an employee on his (a) superannuation or (b) on his retirement or resignation (c) On his death or disablement due to accident/disease. 

The rules of Gratuity Act suggest that an employer has to arrange to pay the amount of gratuity within thirty days from the date gratuity becomes payable to the person.

The Payment of Gratuity (Amendment) Bill, 2018 

Passed by Lok Sabha on 15th March, 2018 and by the Rajya Sabha on 22nd March, 2018, The Payment of Gratuity (Amendment) Bill, 2018has been brought in force on 29th March, 2018. The Act aims at ensuring harmony among employees in the Private and Public Sector. The employee will be entitled to receive gratuity if he has rendered continuous services for at least 5 years with an organization.

Objectives of Gratuity Act
  • To help a retired person take care of his/her expenses post retirement.
  • To recognize the continued efforts of a retired person for an organization.
  • To give a sense of financial security to the retired person


‘Employee’ means a person (other than an apprentice) who is employed for wages. The terms for such employment can be expressed or implied in any kind of work whether it’s manual or otherwise or in a connection with the work of a factory, plantation, railway company, shop to which the Act applies, but doesn’t include a person who holds a designation under the      Central Government or State Government and is governed by any other Act or by any rules providing for the payment of Gratuity.

Gratuity Act applicability on:

a)Every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months.

b) A shop or establishment to which this Act has become applicable shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.

c) Every factory, mine, oilfield, plantation, port and Railway Company.

d) Such other establishments or class of establishments, in which ten or more employees are employed, or were employed, or, any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.

Gratuity Act Rules:

1. Organisation employs 10 or more than 10 individuals: Organizations with the workforce of 10 employees in the preceding 12 months are liable to pay gratuity. If the number of employees of the same organization gets reduced under 10, even then organizations will be liable to pay the gratuity, as per regulations of the Act.

2. Employees need to complete atleast 5 years of continuous services: In order to become eligible for the gratuity amount, an employee has to render his/her services for 5 years continuously. 1 year of continuous services will be considered in case he/she works as a contract employee.

3. Gratuity can be paid only upon certain situations: 

According to the Payment of Gratuity Act 1972, an employee is eligible to avail gratuity upon the situations like retirement, resignation, demise, disablement, VRS, termination or lay off.

4. The calculation of Gratuity is based on the last drawn salary and years of service:

The calculation of Gratuity is calculated on the basis of individual’s last drawn salary and years of service. The formula for calculation differs from the applicability of the Payment of Gratuity Act, 1972.

5. Forfeiture of Gratuity amount: 

According to the Gratuity rules, employers can forfeit to pay a gratuity of the employee who has been terminated for (a) Committing an offence involving moral turpitude (b) Riotous or disorderly conduct or any other violent act.

6. Employers cannot refuse to pay gratuity even during bankruptcy: 

An organization is liable to pay gratuity amount to its employees even if bankruptcy is declared. No court order or decree can restrict an employer against it.

7. Gratuity paid to the legal heir or widow of an employee will be exempt of tax:

At the time of employee’s demise, the gratuity that is paid to his widow or legal heir will be exempt from tax. Any ex-gratia payment made to an employee or his legal heir on account of an injury caused will also be tax-free.

FAQs about Gratuity Act:

Q1. What is the Gratuity Act in India?

Ans.  Gratuity Act covers all the laws related to offering a lump sum amount from an employer’s end to the employees at the time of retirement

Q2. What is the maximum Gratuity payable under the Act?

Ans.  Central Government increases the maximum limit of gratuity from time to time. Now, the Government has issued the notification specifying the maximum limit to Rs. 20 Lakhs

Q3. Who is covered under Gratuity Act 1972?

Ans. Employees who are eligible for superannuation, employees who are retired from the job, individuals who have resigned from the job after continuous employment with the organization for five years. Gratuity is also earned when a person is died or becomes disabled due to accident or sickness.

Q4. Which companies are covered under Gratuity Act?

Ans.  The Gratuity Act is applicable on oil fields, plantations, mines, factories, railways, ports, companies, motor transport undertakings and shops employing 10 or more workmen.

Q5. Is gratuity act compulsory for private companies?

Ans.  Yes! It is applicable for both public and private companies, provided an employee has completed 5 continuous years if work.

Q6.  What covers ‘last drawn salary’ as per Gratuity Act?

Ans. ‘Last drawn salary’ means Basic Salary, Dearness Allowance and Commission received on sales.

Q7. Can a contract employee get an advantage of Gratuity?

Ans. If you are on the company rolls and considered as an employee of the company, then you will receive gratuity. But, if you are under a contract i.e. separate from the company, then the contractor is liable to pay, not the company.

Q8. How can I nominate someone to receive my gratuity in case of my death?

Ans. In order to nominate one or more heirs for the gratuity amount, one needs to fill in Form F.