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Payment of Gratuity Act: Development and Features

Gratuity is essentially a lump sum paid by an establishment when an employee leaves, and is one of the major retirement benefits awarded to an employee. In 2019, the Payment of Gratuity Act was enacted to facilitate the payment of gratuity. This act is capable to employees of factories, mines, oilfields, plantations, ports, railway companies.
Written by:
Abhishek Sahoo
Published on

Payment of Gratuity Act was a Central Labour Legislation which was brought into play for the welfare of workers. It is pertinent to note that, before the enactment of this statute as a central legislation, the states of Kerala and West Bengal were way ahead by enacting their own gratuity acts, which could possibly be attributed to the pro-labour attitude of the left governments of the respective states. There was general agreement at the Labour Ministers’ Conference and the Indian Labour Conference that Central legislation on payment of gratuity might be undertaken at the earliest. Accordingly, the Payment of Gratuity Bill was introduced in the Parliament1. The central legislation in this regard was finally enacted in the year 1972. Through this article, I shall take you on a quick tour of the relevant features and points to be noted in this statute.

Purpose and Applicability

Gratuity is essentially a lump sum paid by an establishment when an employee leaves and is one of the major retirement benefits awarded to an employee. This statute was enacted to facilitate the payment of gratuity. In 2019, the interim budget hiked the tax-free gratuity by doubling the initial upper limit of 10 lakh to 20 lakh.

The Payment of Gratuity Act, 1972 (the Gratuity Act) is applicable to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments with ten or more employees. The gratuity is wholly paid by the employer and there is no system of employee contributions similar to EPF. To be eligible for payment of gratuity, an employee must have at least five full years of service with the current employer. Exceptions to this rule is given to employees who passed away or are rendered disabled due to accident or illness in which cases the gratuity is to be paid regardless of years of service. Hence, the situations where gratuity is paid are: superannuation of employees, retirement, resignation or disablement owing to accident or illness2.



  • The act applies to institutions of work specified under the act, namely, any establishment, factory, mine, oilfield, plantation, port, railway company or shop, under the act. The question of who is the employee is to be answered with reference to whom it belongs to or under whose control the institution works. This idea is reflected in Section 2(c) of the Act.

  • If the work place belongs to or is under the control of the Central Government or any of the State Governments, the person or authority appointed by the appropriate government would be considered the employer; in the event of such a person or authority not appointed, the head of the ministry or department connected would be considered as the employer.

  • Further, if the work place belongs to or is under the control of any local authority, the person appointed by the said local authority would act as the employer and in case of non-appointment, the Chief Executive Officer of the said local authority would be considered as the employer. In both these scenarios, the appointed persons or authorities are so appointed for the supervision and control of employees.

  • Finally, to cover alternative situations to these above-mentioned ones, the act contemplates a third scenario wherein in other cases, the person or authority with ultimate control over such institution, the said person or authority, as the case may be, would be considered as the employer. In the same scenario, if the institution is entrusted to any person, where he may be called Manager, Managing Director or whatever, as the case maybe, such a person would be considered the employer3.


  • As per the Act, ”Employee” means any person (other than an apprentice) who is employed on wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop or other establishment, to which this Act applies. But, a person employed under the Central or State Government, who got other gratuity schemes already in place, will not be eligible for the scheme under this act. A teacher in an educational institution was held to be not eligible for gratuity under this scheme.

  • All employees are entitled to the payment of gratuity except an apprentice which would necessarily mean that the legislature intended to exclude the applicability of the provisions of the Act only in case of apprentice. Nonetheless, the courts have tried to rule as per the intent of the statute. Certain persons were employed as trainees. But they were assigned duties equivalent to those of the other staff and treated as full members of the Department. They were held by the court to be not apprentice but as full employees, and, therefore, entitled to gratuity.

Continuous Service

Gratuity is normally payable to employees who have completed at least five years of continuous service. Keeping aside the exceptions with regard to death or disablement, this is the general rule. Now let’s delve deeper into the definition of Continuous Service. The term has been defined under Section 2 A of the Act. The section defines continuous service as uninterrupted service for the said period with an exception to rather genuine reasons such as accident, sickness, leave, lay-offs, or strike or lock-out or cessation of work which is not owing to the employees’ fault. If the employees take a long time off, that is, a year or six months, the employee should have necessarily worked for a specified period of time during the one year or six months preceding the said long time off. Similar minimum working days apply even to the employees at a seasonal establishment4.

Controlling Authority

  • This is an appointment made by the appropriate government. The appropriate government appoints a person to this post for the administration of this act; different authorities may be appointed for different areas. In connection with the above term “Appropriate Government” requires to be read carefully. When an establishment is covered under the Act and has branches in more than one State the Controlling Authority will be appointed by the Central Government and not by the State.

  • Here, it is pertinent to note that the controlling authority will have to keep to its jurisdictional limits. This authority is not empowered to interfere with orders passed in departmental disciplinary proceedings. Also, the application is required to be filed before the Controlling Authority exercising jurisdiction in respect of the area where the employee retires. Application Form-N, prescribed for making application to the employer and the Controlling Authority also require the employee to mention the place of last posting and the post on which he last worked. This is a relevant factor when it comes to where the authority has to ensure that it has jurisdiction. Here, the controlling authority’s power to allow higher gratuity is worth noting5.

Gratuity Calculation

  • For the purpose of gratuity calculation and determination of rates for the same, the employees could be divided broadly into employees covered under the act and employees not covered under the act.

  • For employees covered under the act there is a formula which could be used to determine the gratuity payable. The formula is based on the 15 days of last drawn salary for each completed year of service or part thereof in excess of six months.

  • In cases where the Act doesn’t apply to the organisations concerned, rendering the employees out of the purview of the act, there is no bar for the employers to pay the gratuity. Here, the gratuity is calculated on the basis of half a month’s salary for every completed year of service.

  • In both cases, the salary includes basic salary, dearness allowance, and commission based on sales6.

  • Here, it is pertinent to note that law that delay in payment would entail eligibility for the employee to claim interest for such a delay. The Supreme Court, in 2008, stated that gratuity is not a bounty to be handed out by the State at its whim. If there is any delay in his payment of gratuity he is entitled to get interest on that delay7.

Compulsory Insurance

  • The amendment to the Payment of Gratuity Act has brought in a provision for compulsory insurance to be taken by the employees, whereby, an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act8. An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan9.

  • Here, it should be noted that this provision comes into effect from such date as notified by the appropriate government alone. It has to be duly noted that section 4A pertaining to compulsory insurance has not been enforced by the Central Government. Hence, there is no need of compulsory insurance of Gratuity Fund except in the State of Andhra Pradesh10. The appropriate government may also exempt employers with an approved gratuity fund to continue with their status quo11.

Failure to Pay Gratuity

Payment of gratuity is a statutory requirement, and hence, no exceptions will be given to the employee if the requirements under the Act are fulfilled. 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. If the employer fails to pay the gratuity, the employee has a right to approach the controlling authority with jurisdiction and seek recourse for the same12.