- 19-Apr-2025
- Healthcare and Medical Malpractice
The Payment of Gratuity Act, 1972 is a key legislation in India that ensures employees receive a gratuity payment as a token of appreciation for their long-term service to an organization. Gratuity is a statutory benefit provided to employees who have rendered continuous service for 5 or more years. The Act governs the payment of gratuity upon retirement, resignation, termination, or death of the employee.
The employee must have rendered continuous service for at least 5 years in the same organization.
Continuous service includes time spent working in the organization, even if the employee is on leave.
Employees are eligible for gratuity payment upon retirement, resignation, death, or disablement.
Gratuity Amount = (Last drawn salary × Number of years of service × 15) ÷ 26.
Here, the last drawn salary includes basic pay and dearness allowance.
The formula accounts for 15 days of salary for every completed year of service.
For example, if an employee worked for 6 years and 8 months with a last drawn salary of ₹30,000 per month:
Gratuity = (₹30,000 × 6 × 15) ÷ 26 = ₹1,38,461 (rounded off).
The maximum amount of gratuity that can be paid under the Act is ₹20 lakh (as per amendments in 2018).
If the employee’s gratuity amount exceeds ₹20 lakh, the excess amount is not covered by the Act, and the employer may choose to pay beyond the limit.
The gratuity must be paid within 30 days from the date of termination, resignation, retirement, or death.
If the employer fails to pay the gratuity within this period, they will be required to pay interest on the delayed amount.
Employees who leave the company before completing 5 years of continuous service are not eligible for gratuity, except in cases of death or disablement.
If an employee is dismissed or terminated for misconduct, they are not eligible for gratuity.
However, if the termination is due to reasons like illness, retirement, resignation, or superannuation, they are entitled to receive gratuity.
In the event of the death or permanent disablement of the employee during service, the gratuity is payable to the nominee or legal heirs of the employee.
The period of service is considered to be continuous, even if the employee does not complete 5 years.
The Payment of Gratuity Act applies to all factories, mines, plantations, shops, and other establishments that have 10 or more employees.
All employees working in the organization are covered under the Act except for employees working in seasonal establishments and those not employed under continuous service.
Employers must register their establishment with the appropriate authorities and maintain records of employees who are eligible for gratuity.
Employers must ensure timely payment of gratuity to eligible employees and comply with the maximum gratuity limit.
Let’s assume a factory with 12 employees. One of the employees, Mr. Sharma, has been working in the factory for 6 years with a last drawn salary of ₹40,000 per month.
Mr. Sharma is eligible for gratuity because he has completed more than 5 years of continuous service.
Gratuity = (₹40,000 × 6 × 15) ÷ 26 = ₹2,76,923 (rounded off).
The employer must pay Mr. Sharma ₹2,76,923 as gratuity within 30 days of his resignation or termination.
The Payment of Gratuity Act, 1972 ensures that employees who have completed a minimum of 5 years of continuous service with an organization are entitled to gratuity upon retirement, resignation, termination, or death. The calculation of gratuity is based on the last drawn salary and the number of years of service. The maximum gratuity payable is capped at ₹20 lakh. Employers must comply with the Act by ensuring the timely payment of gratuity to eligible employees and adhering to the statutory provisions of the Act.
Answer By Law4u Team
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