All You Need to Know About Payment of Gratuity Act 1972

September 20, 2015
employer refuses to pay gratuity

 This article is written by Dhruv Dikshit,  a student of LC-II, Delhi University


Gratuity is one of the most misunderstood and misconstrued components of a person’s salary. In simple terms, it is a retirement benefit paid as gratitude to the employees who have rendered a continuous service for at least five years to incentivize them so that they continue working efficiently. It is an amount paid to an employee based on the duration of his total service but an employee becomes eligible only after he has completed 5 years of his service. Gratuity is paid to an employee when he either retires or his employment is terminated or he resigns or upon his death. Gratuity is given the force of law by the Payment of Gratuity Act 1972, which is further administered and enforced by the Central Government and the designated establishments under its control.


The Payment of Gratuity Act, 1972 is applicable to every factory, mine, oilfield, plantation, port and railway company; every shop or establishment within the meaning of any law in which ten or more persons are employed, or were employed, on any day of the preceding twelve months; such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf. Once the Act becomes applicable to an organization i.e. once an establishment hires more than 10 employees, the Act would continue to apply to the same even after the number of employees gets reduced below the minimum requirement. The Act extends to the whole of India excluding the State of Jammu and Kashmir.


An employee who has rendered at least five years of service becomes entitled to the said benefit. The pre-requisite of completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement to the extent that the person is literally unable to provide the required services. In the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.


An employer may offer gratuity out of the establishment’s funds or may approach an insurance company in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund.

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According to the Act, gratuity shall be payable to an employee on the termination of his employment after he has provided continuous service for not less than five years. The question that arises is, what is the meaning of “continuous service”? An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.



The ratio 15/26 represents 15 days out of the 26 working days in a month

Last drawn salary = Basic Salary + Dearness Allowance

Years of Service are rounded down to the nearest full year.

For example, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

  1. In the case of a piece-rated employee or a person who works on commission, daily wages shall be computed.
  2. For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.
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The employer shall arrange to pay the amount of gratuity within 30 days from the date it becomes active i.e. from the day the person retires or his employment is terminated, to the person to whom the gratuity is awarded. If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate in coherence with the guidelines laid down by the by the Central Government. Gratuity can be paid in cash, demand draft or bank cheque to the employee via his preferred mode of payment.


The employer can withhold or forfeit gratuity wholly or partially even if employee has completed 5 years if the employment of the said employee has been terminated for disorderly conduct or any other misdemeanour or an act tantamount to violence provided that such offense is committed by him in the course of his employment. It may be noted that above act should have been committed by employee during his employment.


Taxability of gratuity depends on the recipient’s job. In case of government employees there is no tax on the gratuity. In case of private sector employees, the gratuity is exempt from tax subject to a maximum of Rs 10 lakhs or 15 days salary for each completed year of service

If a person has received gratuity before and if any exemption was allowed for the same, then the exemption to be allowed during the retirement year gets reduced to the extent of exemption already allowed, subject to the overall limit of Rs 10 lakhs.


  1. A person can himself, or via his authorized person send an application to the employer for payment of the desired gratuity.
  2. As soon as gratuity becomes payable, it is calculated by the employer. Furthermore, the employer gives a notice in writing to the eligible person and also to the controlling authority specifying the amount determined.
  3. The employer must pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.


Payment of gratuity is a statutory requirement. In case an employer fails to pay gratuity amount to an employee, he shall be liable for punishment. Where the employer fails to make payment of any gratuity payable to the employee, he shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to two years. Any employer who contravenes or makes default in complying with any of the provisions of the Act or any rule or order made there under shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both. If an employer makes any false statement or false representation in order to avoid any payment to be made by himself under the Act or of enabling any other person to avoid such payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both.


The gratuity amount payable shall not be twisted in a serpentine manner in execution of any decree or order of any civil, revenue or criminal court.


If the amount of gratuity is not paid by the employer within the prescribed time to the said person, he/she has the right to file a complaint to the Controlling Authority under the Payment of Gratuity Act within the area where the employer’s establishment is situated or where the employee was working at the time of termination. Moreover, the aggrieved person can also approach Labour Courts to get relief and justice.


Severance is paid when an employee is declared redundant. Gratuity is a lump sum amount that an employer pays an employee if he/she retires or resigns from employment. An employee does not contribute any portion of her salary towards this amount. Gratuity is only paid out at the time of retirement or resignation, and in the event of death or being rendered disabled because of an accident or illness. On the other hand, severance is offered to an employee upon being laid off from a company. The receipt of a severance package is contingent upon signing a severance agreement.

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  1. Payment of Gratuity and eligibility; http://www.helplinelaw.com/employment-criminal-and-labour/ECGI/eligibilty-for-claiming-gratuity-in-india.html
  1. Income tax exemption on Gratuity; http://blog.cleartax.in/income-tax-exemption-gratuity/
  1. No tax on gratuity of up to Rs 10 lakh; http://www.business-standard.com/article/pf/no-tax-on-gratuity-of-up-to-rs-10-lakh-114112200779_1.html
  1. You can either get gratuity or service pay; http://www.standardmedia.co.ke/article/1143998587/you-can-either-get-gratuity-or-service-pay
  1. Severance Package; http://www.investopedia.com/terms/s/severence-package.asp
  1. The Applicability and Calculation of Gratuity in India;http://www.india-briefing.com/news/applicability-calculation-gratuity-india-6435.html/#sthash.L3zuyTTW.dpuf
  1. Payment of Gratuity Act 1972
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