Payment of Gratuity Act, 1972: Features, Advantages, Disadvantages and FAQs

What is Payment of Gratuity Act, 1972?

The Payment of Gratuity Act, 1972, is a crucial piece of legislation in India that establishes a standardized pattern for the payment of gratuity, a monetary benefit provided to employees at the end of their service. Gratuity serves as a recognition of an employee’s contributions to an organization, and eligibility for this benefit requires a minimum employment term of five years.

Enacted on September 16, 1972, with parliamentary approval on August 21 of the same year, this Act is a part of India’s labor laws landscape. Similar to the Minimum Wages Act of 1948, it aims to ensure minimum benefits for the welfare of employees. Over the years, the Act has undergone amendments to address evolving needs, such as the inclusion of teachers as employees in 2009.

Geeky Takeaways:

• The act applies to establishments with 10 or more employees.
• Employees who have completed a minimum of 5 years of continuous service are eligible for gratuity.
• In cases of death or disablement, the 5-year service requirement is not applicable.

What is Gratuity under Payment of Gratuity Act, 1972?

The concept of Gratuity, denoting a sum of money paid to an employee at the end of their service, is a familiar term. However, not every departing employee is entitled to this benefit; eligibility requires a minimum employment term of 5 years. Governed by the Payment of Gratuity Act, 1972, this legislation falls within the spectrum of Indian labor laws, akin to the Minimum Wages Act of 1948, and ensures minimum benefits for employees’ welfare. This article delves into the crucial provisions of the Act, including recent amendments.

Features of Payment of Gratuity Act, 1972

Under the umbrella of this legislative framework, the Payment of Gratuity Act, 1972, encompasses several pivotal features, each contributing to a meticulously designed and elegantly executed system:

1. Jurisdictional Reach: The act extends over entities employing a workforce of 20 or more individuals, indicating its application from medium to large-scale organizations.

2. Eligibility Criteria: Gratitude eligibility demands a minimum of five years of uninterrupted service, reserved for those who have demonstrated unwavering commitment to their roles.

3. Calculation Formula: The computation of gratuity intricately links to the employee’s service tenure, employing a formula specifying 15 days’ wages for each completed year. This is capped at a maximum of ₹10 lakhs, fostering a balanced and regulated gratuity framework.

4. Timely Payment Mandate: The Act imposes a stringent temporal constraint, mandating the prompt payment of gratuity within 30 days from an employee’s retirement, resignation, or unfortunate demise. This underscores the paramount importance of timely and efficient gratuity processing.

5. Nomination Provision: In a compassionate provision, employees, in the event of demise, can designate an individual to receive gratuity on their behalf. This empowers employees to exert control over the destiny of their gratuity benefits in unforeseen circumstances.

In essence, the Payment of Gratuity Act, 1972, transcends its role as a mere legal framework. It embodies a commitment to nurture a culture of appreciation and financial security, surpassing the confines of organizational boundaries and service sectors.

Nomination Clauses for Gratuity

Employees have the option to designate a recipient for gratuity in the event of their death, and this nomination process must be completed within 30 days of completing one year of service with an organization. Specific clauses regarding nomination include:

1. For Employees with a Family:

• Employees with a family can nominate one or more family members.
• Nominations made to any person outside the family will be considered void.

2. For Employees Without a Family:

• Employees without a family can nominate a third person.
• However, such a nomination will become void once the employee establishes a family.

3. Subsequent Nominations: In the unfortunate event of the nominated person’s demise, the employee retains the right to nominate another individual.

These nomination clauses ensure a structured and fair process, aligning with the employee’s familiar status and providing flexibility for subsequent nominations when circumstances change.

When is Gratuity paid under Payment of Gratuity Act, 1972?

Gratuity is paid under various circumstances, including:

• Retirement
• Voluntary Retirement Scheme (VRS)
• Death
• Disability due to an accident or disease
• Resignation
• Termination or layoff due to retrenchment

How is Gratuity Taxed in India?

Types	Tax Implication
Central/state government, defense, and local bodies	The entire amount received will not attract any tax.
Employees subject to the provisions of the Act	The following types of organizations are exempted from paying taxes on gratuity: central/state government, defense, and local bodies. For employees covered under the Act, the least of the following amounts is exempt from taxation: i) Actual gratuity received ii) ₹20 Lakh iii) (15 x last drawn salary x number of completed years of service) / 26 For employees not covered under the Act, the least of the following amounts is exempt from taxation: i) Actual gratuity received ii) ₹10 Lakh iii) (15 x average salary for the last 10 months x number of years employed) x 30
Employees covered by the Act’s regulations	The least amount that is exempted from taxation for employees not covered under the Payment of Gratuity Act is the minimum of the following: i) Actual gratuity received ii) ₹10 Lakh iii) (15 x average salary for the last 10 months x number of years employed) x 30

What Conditions Lead to the Termination of Gratuity?

According to the stipulations outlined in the Payment of Gratuity Act of 1972, an employee may be ineligible for gratuity if their termination is based on instances of the following:

• Engaging in moral turpitude.
• Participating in riotous or disorderly conduct.
• Committing any form of violent act.

It is imperative to highlight that an organization is precluded from denying gratuity to an employee due to the organization’s bankruptcy. Moreover, it is essential to underscore that no judicial decree possesses the authority to impede the disbursement of gratuity in such circumstances.

Advantages of Payment of Gratuity Act, 1972

1. Standardized Pattern: It establishes a nationwide pattern for gratuity payments, preventing disparate treatment of employees in organizations with multiple branches across states.

2. Eligibility Criteria: To qualify for gratuity, employees must complete a minimum of five years of continuous service, ensuring a sense of job stability.

3. Monetary Recognition: Gratuity serves as a monetary acknowledgement of an employee’s dedicated service to the company, contributing to their financial security post-employment.

4. Nomination Option: In case of an employee’s demise, they can nominate an individual to receive the gratuity on their behalf, providing a degree of control over its distribution.

5. Legal Framework: The Act establishes a legal framework, specifying the calculation, timing, and conditions for the payment of gratuity, ensuring fairness and consistency.

Disadvantages of Payment of Gratuity Act, 1972

1. Legal Consequences: Non-compliance can result in legal actions, as highlighted by the Supreme Court’s decision in the 2022 case of Independent Schools’ Federation of India v. Union of India. Private schools failing to comply with the act can face legal repercussions, emphasizing the importance of adhering to the policy.

2. Employee Dissatisfaction: Employees who are entitled to gratuity but do not receive it may become dissatisfied, leading to a negative work environment and potential employee turnover.

3. Financial Penalties: The Act includes penalties for false representation, failure to comply, and non-payment of gratuity. Employers may face imprisonment or fines, impacting their financial standing.

4. Loss of Reputation: Companies not following the Payment of Gratuity Act risk damage to their reputation, as employees and the public may view them as not prioritizing employee welfare.

Conclusion

The Payment of Gratuity Act, 1927, promotes employee welfare and has undergone amendments, including provisions for female employees on maternity leave. The Act has limitations, not covering organizations with less than 10 employees, but it overrides other acts in gratuity matters. Implementation improvement is essential, considering the Act is not universally followed by companies.

Payment of Gratuity Act, 1972- FAQs

How is gratuity calculated under the Payment of Gratuity Act, 1972?

The gratuity amount is calculated using the formula:

Gratuity = 

What happens to gratuity in the event of an employee’s death?

Gratuity payable upon an employee’s death is determined based on their service tenure, ranging from 2 times the basic salary for less than a year of service to a maximum of 33 times the basic salary for 20 years or more.

What powers do inspectors appointed under the Payment of Gratuity Act have?

Inspectors appointed for the Act have powers to demand information, enter and inspect premises, examine records, inspect employees, and make copies of relevant documents. Their powers are outlined in Sections 7-A and 7-B.

What penalties are imposed for violations of the Payment of Gratuity Act?

Penalties for violations include imprisonment, fines, or both. False representation can lead to imprisonment for up to 6 months or a fine up to ₹10,000. Failure to comply may result in imprisonment of a minimum of 3 months or a fine of ₹10,000, extendable up to ₹20,000.

How does the Act protect employers from liability, and what conditions must be met for exemption?

The Act exempts employers from liability if they can prove that the alleged offense was committed without their knowledge, agreement, or connivance. Employers must also demonstrate due diligence in enforcing the provisions of the Act.

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