Legal Guide

Insights on the Gratuity Act 1972

by Digant Sharma · 3 min read

Gratuity Act 1972

Introduction

We’ve all heard the phrase “gratuity,” which refers to “a quantity of money paid to an employee at the conclusion of their work.” That, however, does not imply that every person who leaves their job would be compensated in this manner. In order to be eligible for gratuity payout, the minimum period of work must be five years. The Payment of Gratuity Act 1972 governs all of this in India.

The objective of the Act

The Payment of Gratuity Act 1972 (or Gratuity Act 1972) is a type of activity in India similar to the Minimum Wages Act of 1948, which is an extension of labor laws that establishes the minimum benefits that must be supplied to employees. It is a social security law that provides for the welfare of employees working in industries, businesses, and organizations. The writers have examined the essential elements of the Gratuity Act 1972 as well as the most recent revisions in this article.

The purpose and scope of the Payment of Gratuity Act of 1972

The purpose of the Gratuity Act 1972 is to ensure a consistent pattern for gratuity payments to workers across the country in order to avoid treating employees of organizations with branches in various states differently when they are obliged to transfer from one state to another owing to service obligations.

The requirements of this Gratuity Act 1972 apply to all divisions of the federal, state, and municipal governments, as well as military and local governing bodies. Private organizations may be subject to their authority if certain conditions are satisfied. It is a monetary incentive provided to an employee in recognition of his hard work and dedication to the organization.

The Payment of Gratuity Act 1972: Key Sections

Application of the Gratuity Act 1972

Section 1 of the Gratuity Act 1972 indicates that the Act applies to the whole country of India, except in the case of plantations and ports, where the state of Jammu and Kashmir was exempted before 2019, when it was revised to apply to the entire country.

Furthermore, the Gratuity Act 1972 shall apply to the following:

  • Every factory, mine, oil field, plantation, port, and railway company;
  • Every business, as defined by any current legislation governing businesses and premises in a State, where ten or more individuals are employed or were employed on any day in the preceding 12 months;
  • Any other firms or groups of businesses where ten or more persons are or were employed on any day in the preceding year, as designated by the Central Government in a notification.

Who is an employee under the Gratuity Payment Act?

Section 2(e) defines an employee as any person who is paid wages in an establishment, as defined under Section 1(3) of the Payment of Gratuity Act 1972, to conduct any manual, supervisory, technical, or clerical work, regardless of whether the employment terms in an employment agreement are express or implied, and regardless of whether the staff holds a managerial or administrative position.

There has been some discussion about treating teachers as employees; in the case of Ahmedabad Pvt. Primary Teachers’ Association v. Administrative Officer, LLJ, it was determined that teachers who give education to pupils are not regarded as workers who are entitled to gratuity benefits under this Act (2004). The Supreme Court encouraged the legislature to take notice and offer gratuity benefits to teachers through legislation whenever possible.

As a result of the 2009 Amendment Act, the term “employee” now includes any individual engaged in doing any sort of labor. As a result, for the purposes of the Gratuity Act 1972, a teacher has been deemed an employee.

What is Continuous service?

The Gratuity Act of 1972 defines continuous service as continuous service during employment time. This includes leaving due to illness, an accident, a layoff, a strike, and so forth. The employee is not entitled to gratuity payments if the interruption lasts six months or one year. They must have worked at least 190 days in a mine or coalfield-like enterprise (where the maximum period of employment is six months) and 240 days in other sectors. These conditions are generally mentioned in employment contracts.

Who is the Controlling Authority?

As specified in Section 3, the governing authority shall be designated by the competent government to ensure the correct administration of this Gratuity Act 1972. The government may also designate several governing authorities for certain sectors.

What is Gratuity payment?

Section 4 of the Gratuity Act 1972 states that an employee is entitled to a gratuity if they have completed five years of continuous service prior to superannuation, retirement, resignation, disablement, or death. However, in circumstances when the termination is due to death or incapacity, five years of continuous service are not required. In addition to his pension, a retired individual is entitled to a gratuity.

Furthermore, the Gratuity Act 1972 allows for services supplied for at least six months, with the gratuity amount determined at the rate of fifteen days’ earnings based on the rate of wages last collected by the employee in question, provided that the amount paid for overtime work is not taken into account. The gratuity amount must not exceed Rs. 10 lakhs.

When does gratuity become due?

According to Section 4(1) of the Payment of Gratuity Act 1972, a gratuity must be given to an employee upon cessation of employment if he or she has performed continuous service for five years or more.

(a) It must be after he retires, or

(b) When he resigns or retires, or

(c) Upon his death or disability as a result of an accident or sickness.

Who can receive a gratuity?

In the first instance, the gratuity is paid to 

  • the employee.
  • If an employee dies, any gratuity owed to him must be given to his nominee or, if no nominee is named, to his heirs.
  • If either of the aforementioned parties is a minor, the minor’s share must be deposited with the controlling authority, who will invest it in the bank or other financial institution specified for the minor’s benefit until the minor reaches majority, or, if no nominee has been made, to the employee’s heirs.

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What is the maximum amount of gratuity?

Employees will profit from Section 4’s increase in the gratuity ceiling from 3.5 lacs to 10 lacs (3). Section 10(10) of the Income Tax Act of 1961 further increased the gratuity ceiling from Rs. 3.5 lac to Rs. 10 lacs. However, with the notice S.O. 1420 (E) dated March 29, 2018, the gratuity ceiling for people covered by the Payment of Gratuity Act 1972 has been raised from 10 lacs to 20 lacs as of March 29, 2018.

Conclusion

However, the scope of this Gratuity Act 1972 is confined to large-scale corporations or organizations and does not apply to organizations with fewer than ten employees. Since the Gratuity Act of 1972 is comprehensive in its totality, it supersedes previous Acts and legislation relating to gratuity. The sole necessity of the hour is to revise or modify the execution of the Gratuity Act of 1972 since many organizations and enterprises still do not obey it.

Gratuity is a lump sum amount paid by the employer to the employee as a token of appreciation as per your employment contract. Get your Employment contract drafted by experts now.

Digant Sharma

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Digant Sharma

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Gratuity Act

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