The Payment of Gratuity Act, 1972 is an important social security legislation that provides financial benefits to employees as a reward for long and continuous service. Gratuity is a one-time payment made by the employer to an employee at the time of retirement, resignation, death, or disablement due to accident or illness.
Before the enactment of this Act, there was no uniform law ensuring gratuity payments across different industries. The Payment of Gratuity Act 1972 was introduced to bring fairness and consistency, ensuring that employees receive financial security after completing years of dedicated service.
What is the Payment of Gratuity Act, 1972?
The Payment of Gratuity Act, 1972 is a law enacted to provide a monetary benefit called “gratuity” to employees as a token of appreciation for their service. It applies to factories, mines, plantations, shops, educational institutions, and other establishments employing ten or more workers.
Under this Act, gratuity becomes payable to an employee after completing at least five years of continuous service with the same employer. However, the condition of five years is waived in case of death or permanent disablement.
The Act ensures that employees receive financial support at the end of their employment period, thereby promoting loyalty, security, and welfare.
Objectives of the Payment of Gratuity Act 1972
The Payment of Gratuity Act 1972 was introduced to protect the interests of employees and promote their financial stability after long-term service. It aims to ensure that workers are rewarded for their contribution and dedication to the organization.
| Objective | Description |
| Financial Security | To provide financial support to employees after retirement or termination of service. |
| Employee Welfare | To promote employee welfare and strengthen employer-employee relationships. |
| Encouragement for Long Service | To reward employees for continuous and loyal service. |
| Social Protection | To offer financial assistance to the employee’s family in case of death or disability. |
| Uniform Law | To create a consistent framework for gratuity payments across all establishments. |
Coverage and Applicability of the Payment of Gratuity Act 1972
The Act applies to a wide range of establishments in both public and private sectors. It covers employees working in factories, mines, plantations, shops, and other establishments with ten or more employees.
| Particulars | Details |
| Type of Establishments | Factories, mines, plantations, shops, educational institutions, and other establishments |
| Minimum Number of Employees | 10 or more |
| Eligibility | Minimum 5 years of continuous service (except in case of death or disablement) |
| Administered By | Ministry of Labour and Employment |
| Coverage Area | All States and Union Territories of India |
Once an establishment comes under the purview of the Act, it continues to be covered even if the number of employees falls below ten at a later date.
Calculation of Gratuity
The amount of gratuity payable to an employee is based on the employee’s last drawn salary and the number of years of continuous service. The formula for calculating gratuity is simple and standardized.
| Formula | (Last Drawn Salary × 15 × Number of Completed Years of Service) ÷ 26 |
Explanation:
- Last Drawn Salary includes Basic Pay + Dearness Allowance.
- 15 represents 15 days’ wages for each completed year of service.
- 26 is the number of working days in a month used for calculation.
Example:
If an employee’s last drawn salary is ₹30,000 and they have worked for 10 years, gratuity = (30,000 × 15 × 10) ÷ 26 = ₹1,73,077.
The maximum limit of gratuity payable under the Act (as per latest amendment) is ₹20 lakh.
Forfeiture and Exemption of Gratuity
In certain situations, gratuity may be forfeited partially or completely. This happens when the employee is terminated due to misconduct or acts causing financial loss to the employer. However, gratuity cannot be denied for ordinary reasons like resignation or poor performance.
Some establishments may also be exempted from the Act if they provide better or more beneficial gratuity schemes to their employees than those prescribed under the Act.
Importance of the Payment of Gratuity Act 1972
The Payment of Gratuity Act 1972 holds great significance for both employees and employers. It promotes financial security, strengthens employee loyalty, and enhances social welfare.
The Act helps employees save for their post-retirement life and ensures they are not left financially unstable after years of service. For employers, it improves employee satisfaction and retention, fostering a positive work environment.
Frequently Asked Questions (FAQs)
Q1: What is the Payment of Gratuity Act, 1972?
A1: The Payment of Gratuity Act 1972 is a law that provides a financial benefit to employees as a reward for their long and continuous service. It ensures that employees receive gratuity upon retirement, resignation, death, or disablement.
Q2: Who is eligible for gratuity under this Act?
A2: An employee who has completed a minimum of five years of continuous service with the same employer is eligible for gratuity. However, in case of death or permanent disablement, the five-year condition is not required.
Q3: How is gratuity calculated under the Payment of Gratuity Act 1972?
A3: Gratuity is calculated using the formula: (Last Drawn Salary × 15 × Number of Completed Years of Service) ÷ 26. The salary includes Basic Pay and Dearness Allowance, and the maximum gratuity payable is ₹20 lakh.
Q4: Can gratuity be forfeited by the employer?
A4: Yes, gratuity can be forfeited partially or fully if the employee is dismissed for misconduct, causing financial loss, or engaging in unlawful activities against the employer’s interest.
Q5: Why is the Payment of Gratuity Act 1972 important?
A5: The Payment of Gratuity Act 1972 is important because it provides financial stability to employees after years of service, promotes loyalty and job satisfaction, and ensures that their contribution is recognized and rewarded fairly.
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