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October 30, 2023by canonsphere0

This blog is written by Samriddhi Sinha, a 4th year Student of Brainware University.


The term “gratuity,” generally understood as the amount of money distributed to an employee upon termination of employment, is subject to a criterion of eligibility To receive the bonus, a person must have worked for at least five years. In India, this provision, the Payment of Gratuity Act, 1972, which has employment laws similar to the Minimum Wages Act, 1948. It provides minimum rights to employees to contribute to their social security Act in various sectors, and is essential social security measures for employees involved in companies and organizations.

Payment of Gratuity Act, 1972, applies to establishments employing ten or more persons. Its main purpose is to provide social security benefits to employees after retirement, even if the retirement is due to retirement or due to physical disability or loss of basic bodily function. Consequently, the Gratuity Payment Act, 1972, plays an important role in creating economic welfare in safeguarding the economic welfare of salaried persons employed in various sectors, industries and industries. For an employee to assert the right to receive gratuity, a minimum of five years of service with the organization is a prerequisite.

History of the Bill

Gratuity Payment Act, 1972 which provides for the payment of gratuity to employees in India from the labor and industrial conditions of the country. Prior to the enactment of this act, there was no specific statutory provision to provide financial security to employees upon retirement, retirement or death and the need for such legislation became more apparent as India industrialized and the trade unions expanded it.

To address this gap and recognize the need for retirement benefits for employees, the Payment of Gratuity Act Bill was introduced in Parliament in 1971. The Bill was debated and passed debate in both Houses of Parliament, resulting in many amendments and amendments.

On August 21, 1972, the Compensation Bill received Presidential assent, marking an important milestone in the extension of rights and benefits for the Indian labor Act came into force on September 16, 1972 . 1972 with the primary objective of providing graduate workers with a certain period of economic security for continued service to their employers

Over the years, the Code has undergone changes and changes in line with changing economic conditions and labor migration. It has a vital role to play in improving the well-being of workers in various sectors, ensuring their financial stability upon retirement or termination of employment

Today, the Payment of Gratuity Act, 1972, forms an integral part of the Indian labor law, and is a testament to the country’s commitment to protect the interests of its workers and redeem their dedicated services for the nation’s industry and economic development.

Object of the Act

Payment of Gratuity Act, 1972, states its main objective to establish a uniform system for allocating gratuity to employees across the country This objective is to eliminate the possibility of disparate treatment for employees working for organizations with states in various forms have been eliminated.

On August 21, the parliamentary bill received parliamentary approval and subsequently came into effect on September 16 of the same year. The Act casts a wide net of applications, covering all branches of central, state and local government, as well as the armed forces and local government units, which fall under that Act Notably, some private sectors may also be covered to meet certain standards in the government Act.

This statutory measure establishes gratuity as an extension of financial compensation in recognition of an employee’s dedicated service and unwavering commitment to the employing organization’s primary purpose and to ensure equity and consistency in the treatment of employees at the national level, especially when their professional responsibilities require cross-border flexibility.

Important Provisions (amended provisions)

  1. Section 1 of the Act provides for territorial application, extending to the whole of India, with the exception of ports in Jammu and Kashmir, which were exempted before 2019 but subsequently brought under modification under its purview.

In addition, the Act shall apply to the following.

General manufacturing, mines, oil fields, plantations, ports and railways.

All businesses, as defined by applicable laws for businesses and locations in the state, in which ten or more individuals are currently employed or previously employed in any of the preceding 12 months.

Any other industries or undertakings employing ten or more persons for the present or past year, as may be specified by the Central Government by notification.

  • Section 2(e) of the Act defines “employee” as any person who receives remuneration for his services in an establishment, as defined in Section 1(3) of the Payment of Gratuity Act, by persons employed in this book, supervisor, including technical skills , or clerical roles, regardless of whether their employment policies are explicitly or implicitly identified. The definition includes all managerial and executive positions, excluding persons holding positions at the federal and state levels who enforce various practices or policies relating to gratuity payments Under
  • Section 2-A, “continuous service” is defined as an indefinite period of employment, which includes periods of service which may be subject to various factors such as sickness, accidents, approved holidays, layoffs their dismissal, strike, lockout, resignation etc. shall be canceled This definition excludes cases in which an order has been issued in accordance with standing orders, rules or regulations applicable to the employees of the organization not included, and such absence from duty is considered a leave of absence from service
  • Section 3 of the Act mandates that the competent authority appoint a regulatory body to ensure the proper implementation of this law. The government also has the power to appoint different administrative authorities for a particular territory.
  • According to Section 4 of the Act, an employee is entitled to gratuity on completion of five years of continuous service, which may be interrupted by reasons such as sickness, accident, vacation, dismissal, strike of service, closed service, absence without leave but for these five years the requirement does not apply in cases of termination due to death or disability. Retired persons are also entitled to gratuity in addition to their pension, as per the Supreme Court Rules in Allahabad Bank and Others v. All India Allahabad Bank Retired Employees Union (2009)[1] also states that if an employee has served for at least six months, gratuity amount is calculated on fifteen days pay excluding overtime pay. The maximum free amount shall not exceed Rs. 10 lakhs is available.
  • Section 4(1) of the Payment of Gratuity Act 1972 provides for payment of gratuity to an employee on termination of employment, if the employee has completed five or more years of continuous service to be terminated by retirement, termination on employment, death or disability as the result of an accident or disease is due .
  • Section 4(6) sets out two circumstances in which a person’s allowance may be forfeited:
  • If the termination of employment is the result of any intentional act, omission, or negligence that damages the employer’s property, compensation is collected to the extent of the damage.
  • Partial or complete gratuity forfeiture for behavior involving riotous conduct, violence, or acts of moral turpitude committed during the course of employment.
  • Section 4A of the Act mandates compulsory insurance for all employers, excluding those under the central or state government, through either the Life Insurance Corporation or another company. Employers with an established and registered gratuity fund within their company are exempt from this requirement. Violation of this provision may lead to penalties, with the government empowered to establish rules for its enforcement.
  1. Under Section 5, the appropriate government can exempt establishments (factories, mines, oilfields, plantations, ports, railway companies, or shops) or certain employees or classes of employees from gratuity provisions if it deems that the establishment offers benefits at least as favorable as those provided by the Act.
  • Section 6 requires employees to submit a nomination within 30 days of completing their first year of employment under the Payment of Gratuity Act, 1972.
  • Section 7 outlines the process for determining the gratuity amount, requiring the entitled person to submit a written application to the employer. The employer must calculate the gratuity amount, notify the employee and the controlling authority, and make the payment within 30 days. Failure to do so results in the payment of simple interest. However, if the delay is due to the employee’s actions, the employer is not liable for interest.
  • If the employer fails to make timely gratuity payments, Section 8 empowers the controlling authority to issue a certificate to the collector on behalf of the aggrieved party to recover the outstanding amount, including compound interest determined by the central government. This action is subject to two conditions: giving the employer an opportunity to explain the delay and ensuring that the interest amount does not exceed the gratuity owed.
  • Under Section 10 of this Act, an employer facing charges for offenses punishable under this legislation may be absolved of liability if they can establish valid reasons for their actions or prove that another individual, acting without their knowledge, was responsible for the offense. In such cases, if the other party is found guilty, they will face the same penalties as the employer. To secure exoneration, the employer must demonstrate two key points to the court:
  • That the alleged offense was committed by the other individual without the employer’s knowledge, consent, or collusion.
  • That the employer diligently enforced compliance with the Act.
  • Section 11 stipulates that the court cannot initiate legal proceedings for offenses punishable under this Act unless the gratuity amount owed remains unpaid or unrecovered for six months beyond the prescribed time limit. In such instances, the government has the authority to empower the controlling authority to file a complaint. The controlling authority must then file a complaint with the metropolitan magistrate or judicial magistrate of the first class within 15 days of receiving this authorization.
  • Section 12 shields the controlling authority from legal action if their actions were carried out in good faith or in accordance with established rules or orders.
  • As per Section 13, exempted gratuity payments due to employees from their employer under this Act are not subject to attachment by any court order or decree.
  • Section 14 establishes the overarching authority of the Payment of Gratuity Act, rendering it superior to all other provisions, regulations, and statutes pertaining to gratuity. The power to create rules under Section 14 of the Payment of Gratuity Act, 1927, resides with the appropriate government and is proclaimed through notification.
2022 Gratuity Rules

The 2022 gratuity regulations mandate that employers ensure an employee’s basic pay constitutes 50% of their total Cost to the Company (CTC), with the remaining 50% comprising employee allowances, house rent, and overtime compensation. Any extra allowances or exemptions exceeding this 50% CTC threshold provided by the employer will be categorized as compensation.

These regulations also establish a cap, limiting the maximum basic pay to 50% of the CTC. This cap enhances employees’ gratuity entitlement, which is calculated based on a comprehensive wage structure encompassing both basic pay and allowances.

Additionally, the new rules outline that employees are entitled to compensation for overtime work, defined as working for a period of 15 minutes or longer. The government has set a maximum working limit of 48 hours.

The Payment of Gratuity (Amendment) Act, 2018, received Presidential assent on March 28, 2018, and came into effect on March 29, 2018, as notified by the Ministry of Labour and Employment.

The main objective of this amendment is to establish parity between employees in the private sector and those in Public Sector Undertakings/Autonomous Organizations under the Government who are not covered by CCS (Pension) Rules. Under this amendment, these employees are entitled to receive a higher gratuity amount, aligning them with their counterparts in the Government sector. Gratuity is a benefit provided to employees who have served continuously with an organization for at least five years and is typically disbursed upon retirement, subject to certain terms and conditions. It is also payable in case of an employee’s superannuation, resignation, or in the unfortunate event of death or disablement due to an accident or disease.

To account for inflation and wage increases for private sector employees, the Government deemed it necessary to revise the entitlement to gratuity for employees covered by the Payment of Gratuity Act, 1972.

Key Amendments:

Removal of Ceiling Limit: The amendment eliminates the maximum limit of gratuity payable, which was previously set at Rs. 10 lakhs in 2010. Section 4(3) of the Act, which imposed this upper cap, has been repealed. As per the new Section 4(5) of the Act, if an employment contract specifies a higher gratuity amount beyond the ceiling limit mentioned in the Act, the employee is entitled to that higher amount. This change was introduced to align with the 7th Central Pay Commission’s recommendations, which increased the ceiling for gratuity from Rs. 10 lakhs to Rs. 20 lakhs for Central Government employees. Instead of fixing the ceiling amount in the Act, the amendment grants the Central Government the authority to notify the ceiling amount, allowing for periodic revisions to account for wage increases, inflation, and future Pay Commissions.

Extension of Maternity Leave: The amendment also addresses maternity leave provisions. Under the previous Act, the maternity leave period for female employees in continuous service was twelve weeks, as stipulated in Section 2A. The amendment extends the maternity leave period from ‘twelve weeks’ to ‘twenty-six weeks’ to align with the recently amended Maternity Benefit Act. This adjustment also resolves the calculation of continuous service for the payment of gratuity to employees on maternity leave.

Need and Significance

The Payment of Gratuity Act, 1972, holds significant importance in the Indian legal framework as it plays a crucial role in safeguarding the financial interests and well-being of employees, particularly those in the organized sector. Below are some key aspects highlighting the significance of this Act:

One of the primary objectives of the Payment of Gratuity Act is to provide financial security to employees. It ensures that employees who have dedicated a significant portion of their lives to a particular organization are rewarded with a gratuity amount upon retirement, superannuation, resignation, or in cases of disablement or death. This financial cushion helps employees and their families maintain their standard of living and meet various financial obligations.

The Act recognizes and rewards the loyalty and long-term commitment of employees to their employers. By mandating the payment of gratuity for employees with a minimum of five years of continuous service, it incentivizes employees to stay with an organization for an extended period, contributing to stability and productivity.

The Act is a manifestation of the government’s commitment to social welfare and the protection of employee rights. It ensures that employees are not left without financial support during crucial life events such as retirement or in the unfortunate event of death or disability. This aligns with the principles of social justice and economic well-being.

While the Act places an obligation on employers to provide gratuity to eligible employees, it also serves as an incentive for employers to create a conducive work environment that encourages employee retention. Employers who adhere to the Act’s provisions are more likely to attract and retain talented individuals.

The Payment of Gratuity Act provides a clear legal framework for the calculation, payment, and administration of gratuity. This clarity reduces disputes between employers and employees and ensures fairness in gratuity-related matters.

By ensuring that retirees and their families have a financial cushion, the Act indirectly contributes to the economic stability of the country. It reduces the burden on social welfare systems and promotes self-reliance among retirees.

Criticism and limitations

The Payment of Gratuity Act, 1972, while well-intentioned, has faced several criticisms and challenges over the years. Here are some of the key criticisms of the Act:

  • Limited Coverage: One of the primary criticisms of the Act is its limited coverage. It only applies to establishments with ten or more employees. This leaves a substantial portion of the workforce, particularly those in small-scale industries and the informal sector, without the benefits of gratuity. This limitation results in unequal treatment of employees and excludes many vulnerable workers from its provisions.
  • Eligibility Criteria: The Act mandates that an employee must have completed at least five years of continuous service to be eligible for gratuity. This criterion can be restrictive, especially in industries where job turnover is high. Employees who leave an organization before completing five years are left without any gratuity benefits, despite their contributions to the organization.
  • Inadequate Gratuity Amount: The Act places a cap on the maximum gratuity amount, which was last revised in 2010. The maximum limit of Rs. 10 lakhs is considered insufficient, especially in today’s economic climate with rising living costs and inflation. This cap has not kept pace with the changing economic landscape, and many argue that it should be increased to provide more meaningful financial security to retirees.
  • Dependency on Employer’s Discretion: The Act leaves the calculation of gratuity in the hands of the employer. This can lead to disputes and potential underpayment, as employers may interpret the rules differently or be reluctant to pay higher amounts. Employees often have to rely on the goodwill of their employers to receive their rightful gratuity.
  • Lengthy Processing Time: The Act stipulates that gratuity should be paid within 30 days of becoming payable. However, in practice, this timeline is often not adhered to, leading to delayed payments for employees. The prolonged processing time can cause financial strain on retirees who depend on this amount for their post-retirement expenses.
  • Lack of Portability: Gratuity benefits are typically tied to a specific employer. When employees change jobs or organizations, they do not have the option to transfer their gratuity benefits to the new employer. This lack of portability limits employees’ flexibility and may discourage them from exploring better job opportunities.
  • Exclusion of Certain Categories: The Act excludes certain categories of employees, such as agricultural workers and casual laborers, from its purview. This exclusion can lead to a lack of social security for these vulnerable groups, making them susceptible to financial hardships during retirement or in case of disability.


The Act established a gratuity system and ensured that employees were rewarded for their loyalty and service. It addresses important issues such as eligibility, scholarship calculations and maximum scholarship limits.

However, the Act is not without limitations and criticism. Small businesses that have faced challenges with their limited coverage, stringent eligibility standards and free cash flow adequate in today’s economic climate are concerned about staffing inequalities, the exclusion of certain categories of employees and the non-portability of benefits

In light of this criticism, there is a critical need to review and amend the Compensation Act to make it more inclusive, fair and reflective of changing socio-economic conditions. The changes should aim to expand coverage, consider revising eligibility criteria, and adjust maximum retirement limits to provide financial security improved for retirees.

Despite its imperfections, the Act is an important step towards recognizing the value of employee contributions and the right to dignified retirement. This principle emphasizes that an individual’s long-term commitment to his or her work should be recognized and rewarded. As the Indian workforce evolves, the Payment of Gratuity Act must evolve with it, ensuring that it continues to play a meaningful and relevant role in employment law in the coming years.

In this context, a comprehensive review and amendment of the Code should be a priority, taking into account the changing needs and expectations of employees, while maintaining the fundamental principle of providing financial security for employees at in their retirement years.

[1] Allahabad Bank and Others v. All India Allahabad Bank Retired Employees Union (2009), Civil Appeal No. 1478 of 2004

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