Payment of Gratuity Act, 1972

Gratuity is a payment made to an employee at the time of termination of services with his employer arising out of retirement, resignation or otherwise. Prior to the enactment of the Payment of Gratuity Act,1972 there was no legal compulsion for the employer to pay any gratuity to the employee. The provision in relation to the payment of such severance benefits was totally dependent upon the bilateral contracts between the employer and the employee. The Payment of Gratuity Act 1972 ensures a uniform pattern of payment of gratuity to the employees throughout the country as a part of the social security laws.

Payment of Gratuity Act,1972

Objectives of Payment of Gratuity Act

  1. To provide a scheme for the payment of gratuity to employees.
  2. To provide for matters connected with or incidental to the scheme for payment of gratuity.
  3. To provide retiring benefits to employees who have rendered continuous services to his employers and thereby contributed to his prosperity.
  4. To define the principles of payment of gratuity according to the prescribed formula.
  5. To provide machinery for the employment of liability for payment of gratuity.

Short title, Extent and Commencement of the Act [Section 1]

1. This Act may be called the Payment of Gratuity Act, 1972.

2. It extends to the whole of India. It is provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu and Kashmir.

3. The Act applies to:

  1. Every factory, mine, oilfield, plantation, port and railway company;
  2. Every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in State, in which 10 or more persons are employed or were employed, on any day of the preceding 12 months;
  3. Such other establishments or class of establishments in which 10 or more employees are employed, or were employed, or were employed, on any day of the preceding 12 months, as the Central Government may, by notification published in the Official Gazette, specify in this behalf [Section 1(3)],

4. The Act does not apply to:

  1. Apprentices, and
  2. Persons who hold civil posts under the Central Government or a State Government and are governed by any other Act or by any rules provided for payment of gratuity.

5. The government may, however, exempt any establishment covered by this Act from the provisions of the Act, if its employees are in receipt of gratuity or pensionary benefits not less favourable than the benefits provided by this Act [Section 5(1)].

Definitions Under the Payment of Gratuity Act

1. Appropriate Government [Section 2(a)]: Appropriate Government means:

i). In Relation to an establishment:
  1. Belonging to, or under the control of, the Central Government.
  2. Having branches in more than one State.
  3. Of a factory belonging to, or under the control of, the Central Government.
  4. Of a major port, mine, oilfield or railway company, the Central Government.

ii) In any other case, Appropriate Government means the State Government.

2. Completed year of service [Section 2(b)]: Means continuous service for one year.

3. Continuous Service [Section 2(c)]: Means continuous services as defined in Section 2-A.

4. Employee [Section 2(f)]: Means any person other than an apprentice who is employed for wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment, to which this Act applies, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.

5. Retirement [ Section 25(q)]: Means termination of the service of an employee otherwise than on superannuation.

6. Superannuation [Section 2 (r)]: In relation to an employee, means the attainment by the employee of such age as is fixed in the contract or conditions of service at the age on the attainment of which the employee shall vacate the employment.

7. Wages [Section 2 (s)]:  Means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.

8. Family [Section 2 (h)]: Family shall be deemed to consist of himself, his wife his children whether married or unmarried, his dependent parents, and the dependent parents of his wife and the widow and children of his predeceased son, if any [Section 2 (h)(i)].

Maximum Gratuity

Section 4(3) of the Act provides that the amount of gratuity payable to an employee shall not exceed Rs/- 10,00,000. The Amendment Act of 1994 replaced the existing ceiling of 20 months’ wages for payment of gratuity by a monetary ceiling of Rs/- 50,000. The Amendment Act of 1997 has raised it to Rs/- 2,50,000, it was further raised to Rs/- 3,50,000 and how the Amendment Act, 2010 has raised it to Rs/- 10,00,000.