Gratuity Payment Rules Act in India 1972

The Gratuity Act of 1972 in India, ensures the payment of gratuities to the employees in India. This act covers all the factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, and shops or establishments with 10 or more workers. 

Here's how it works:

1. Payment Rate: Employees get a gratuity of 15 days' wages for each year of service, with a maximum limit of ₹10 lakh.
2. Seasonal Work: For seasonal jobs, the gratuity is 7 days' wages for each season worked.

What is Gratuity?

Gratuity is a lump sum compensation made to the employees, as a gratitude and acknowledgment towards their hard work and effort over all the years. Generally, gratuity is received when the employee has completed 5 years of working with an organization.

It also serves as a motivation for employees, as a recognition of their input.

Who is responsible for paying gratuity?

It is mandatory for companies that have a workforce of a minimum of 10 people to provide gratuity to their employees, as per the Gratuity Payment Rules Act in India 1972.

Gratuity Act 1972 Eligibility

As per the act, to be eligible for gratuity, an employee must have worked for the same company for a minimum of 5 years. This will be paid to employees at the time of their-

• Retirement or resignation
• At the time of their superannuation

For the calculation for this 5 years, 1 year would be 240 working days, for people not working undergrounds. For those who work underground, e.g., in mines and under such conditions, for them 1 year would be 190 working days.

This eligibility of 5 years is not compulsory in the case of an employee’s death or disablement due to an accident or disease.

Disablement here means an injury or illness that prevents an employee from doing the work they were able to do before the accident or illness happened.

Nomination under the Gratuity Act 1972

As per, Gratuity Payment Rules Act in India 1972, after completion of 1 year of service, an employee needs to make a person nominee for their gratuity, in case of death.

Below mentioned are the clauses for nomination under this act-

1. The amount of gratuity in this situation can be distributed amongst more than one nominee.
2. At the time of nomination, if the employee has a family, then the nomination would be in favor of any of the member
3. In case an employee does not have any family, nomination can be made in the favor of a 3rd party, but this is valid only till the time when the employee has no acquired family.
4. If the submitted nominee dies, the employee needs to make another family member their nominee
5. In case of any change in the nomination, the employee needs to do a written submission to their employer.

Payment of Gratuity

Below are the mentioned times when gratuity is being paid-

1. Retirement - At the time of employee retirement, the employer pays them a gratuity as a token of gratitude for their hard work.
2. Resignation - If an employee resigns after completing 5 years of work within the organization, they are paid gratuity.
3. Death - On the death of an employee, their gratuity amount is paid to their nominee.
4. Disability - Gratuity is also paid, in case of any injury or illness that prevents an employee from doing the work they were able to do before the accident or illness happened

Gratuity calculation

Gratuity is calculated based on three main factors: 

1. the employee’s last drawn salary
2.  the number of years they have worked with the organization, and 
3. the gratuity rate set by the employer.

Here’s the formula to calculate gratuity:

Gratuity = (Last drawn salary x Number of years of service x 15) / 26

Where-

Last drawn salary: The final salary the employee received.

Number of years of service: The total time the employee has worked with the organization.

15: Represents the number of days of salary for each completed year of service.

26: Represents the number of working days in a month.

Use our Gratuity Calculator to easily compute your gratuity amount.

Example Calculation-

If an employee worked for 8 years and their last drawn salary was Rs. 50,000 per month, the gratuity would be calculated as follows:

Gratuity = (50,000 x 8 x 15) / 26 = Rs. 2,30,769

So, the employee would receive Rs. 2,30,769 as gratuity

Important Points

1. The maximum gratuity payable under the Payment of Gratuity Act 1972 is Rs. 20 lakhs.
2. Employers can set different gratuity rates, which must be specified in the employment contract.

If an employer specifies a gratuity rate of 18% of the employee’s last drawn salary, and the employee worked for 7 years with a last drawn salary of Rs. 60,000 per month, the calculation would be:

Gratuity = (60,000 x 7 x 18) / 26 = Rs. 2,91,923

In this case, the employee would receive Rs. 2,91,923 as gratuity. By understanding these factors and the formula, employees can easily calculate their gratuity amount.

Tax Implications on Gratuity

Conditions for Termination of Gratuity

As, per the Gratuity Payment Rules Act in India 1972, gratuity is denied to employees, in below mentioned circumstances-

1. Committing an offense involving moral dishonesty.
2. Engaging in riotous or disorderly behavior, or any other violent act.