Payment of Gratuity Act, 1972

5/22/23, 6:03 PM Payment of Gratuity Act, 1972 - iPleaders
Payment of Gratuity Act, 1972

By Rachit Garg - November 8, 2022
This article is written by HEMA MODI, a second-year student of Pravin Gandhi College of
Law, Mumbai and Kishita Gupta, a graduate from the Unitedworld School of Law,
Karnavati University, Gandhinagar, graduate. It provides an overview of The Payment of
Gratuity Act, 1972 and its different provisions, along with landmark judgements.
It has been published by Rachit Garg.
Table of Contents 
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1. Introduction
2. Scope and objective of the Payment of Gratuity Act, 1972
3. Key provisions of the Payment of Gratuity Act, 1972
3.1. Applicability of the Act
3.2. Who is an employee under the Payment of Gratuity Act
3.3. Continuous service
3.4. Controlling authority
3.5. Payment of gratuity
3.5.1. When does gratuity become payable
3.5.2. To whom the gratuity can be paid
3.5.3. What is the threshold limit of gratuity
3.5.4. Forfeiture of gratuity
3.6. Compulsory insurance
3.7. Power to exempt
3.8. Nomination
3.8.1. When to file for nomination
3.8.2. Who can be nominated
3.8.3. How to nominate
3.8.4. Can a will override the beneficiary nomination
3.8.5. Forms used for nomination
3.9. Determination of the amount of gratuity
3.9.1. Calculation of gratuity
3.9.1.1. Employees not covered under the Act
3.9.1.2. Gratuity in case of death of an employee
3.10. Inspectors appointed for the purpose of the Payment of Gratuity Act and their powers
3.11. Recovery of Gratuity
3.12. Penalties under the Payment of Gratuity Act
3.13. Exemption of employer from liability
3.14. Cognizance of offences as per the Payment of Gratuity Act
3.15. Protection of action taken in good faith
3.16. Protection of gratuity
3.17. Act to override other enactments
3.18. Power to make rules
3.18.1. Validation of amendments made in this Act
4. 2022 Gratuity Rules
5. Tax calculation of gratuity after the latest rules
6. Conclusion
7. Frequently Asked Questions (FAQs)
7.1. Am I entitled to a gratuity if I leave a company after 4.5 years of employment?
7.2. Is the maximum gratuity I may earn capped?
7.3. What are the new gratuity policies for employees in the private sector?
7.4. How to report non-payment of gratuity?
8. References
Introduction
We all must have heard the term ‘gratuity’ which means “a sum of money that is paid to
an employee at the end of the service.” Well, that doesn’t imply that every employee
who leaves employment will receive an amount like that. So, in order to be eligible for
the payment of gratuity, the minimum term of employment must be 5 years. In India,
this is all governed by the Payment of Gratuity Act, 1972. The Payment of Gratuity Act is
a genre of statutes in India like the Minimum Wages Act of 1948, which is an extension
of labour laws and it lays down the minimum benefits to be provided to the employees.
It is a social security enactment providing for the welfare benefits of employees working
in industries, companies, and organisations. In this article, the authors have discussed
the key provisions of the Act along with the latest amendments.
Scope and objective of the Payment of Gratuity

Act, 1972
The Act lay out its objective to guarantee a standard pattern for gratuity payments to
employees across the nation in order to prevent treating employees of organisations with
branches in multiple states differently when they may be required to transfer from one
state to another due to service requirements.
On August 21, the Act was approved by Parliament, and it became operative on
September 16 of that same year. All divisions of the central, state, and local
governments, as well as the military and local governing bodies, are subject to the
provisions of this Act. If certain requirements are met, private organisations may fall
under its jurisdiction. It is a monetary reward given to an employee in appreciation of his
work and devotion to the company.
Key provisions of the Payment of Gratuity Act,

1972
Applicability of the Act

Section 1 of the Act states that the Act extends to the whole of India except in cases of
plantations and ports, where the state of Jammu and Kashmir was exempted before
2019, where it was amended to extend to the whole of India.
Further, the Act shall be applicable to the following:
1. Every manufacturing unit, mine, oil field, plantation, port, and railway firm;
2. Every business, as defined by any law currently in effect with regard to businesses
and premises in a State, where ten or more people are employed or were employed
on any day during the previous 12 months;
3. Any other businesses or groups of businesses where ten or more people are employed
or were employed on any day during the previous year, as the Central Government
may designate in a notification.
Who is an employee under the Payment of Gratuity Act
An employee is defined in Section 2(e) as any person who is paid wages in an

establishment, as defined in Section 1(3) of the Payment of Gratuity Act, 1972, to
perform any manual, supervisory, technical, or clerical work, regardless of whether the
terms of the employment are express or implied and regardless of whether the employee
holds a managerial or administrative position. But the definition tends to exclude any
such individual who occupies a position with the federal or state governments and is
subject to another Act or any guidelines governing the payment of gratuities.
There has been a debate on considering teachers as employees. Teachers who impart
students’ education were ruled not to be considered employees who avail of gratuity
benefits under this Act in the case of Ahmedabad Pvt. Primary Teachers’ Association v.
Administrative Officer, LLJ (2004). The Supreme Court asked the legislature to take
cognizance and provide the teachers with gratuity benefits through statutes wherever
necessary.
Therefore, through the 2009 Amendment Act, the term “employee” has now been
expanded to include any person hired to perform any type of labour. As a result, a
teacher is considered an employee for purposes of the Act.
More recently, the Supreme Court, in the case of Independent Schools’ Federation of
India (Regd.) v. Union of India (2022), upheld the Payment of Gratuity (Amendment)
Act, 2009’s constitutional validity and held that the Amendment aims to bring equality
and provide teachers with equitable treatment. It’s difficult to label it as an arbitrary or
arrogant activity.
Notably, the aforementioned Amendment Act was introduced to extend the benefit of
gratuity to teachers who had previously been denied it by incorporating them into the
category of “employee”. The Court ruled that private schools “should not succeed” when
asserting a vested right resulting from a flaw because acceptance would be at the
expense of the teachers, who would lose the intended advantage. The Court upheld the
Amendment Act’s legality and ordered private schools to pay employees and teachers
within six weeks, along with interest, in accordance with the Act’s provisions. If this is
not done, the employees and teachers may file a lawsuit in the appropriate forum to
have the payment made in accordance with the Act’s requirements.
Continuous service
According to this Act, continuous service means uninterrupted service during the
employment period. This includes leaving due to sickness, accident, layoff, strike, etc. If
the interruption is for six months or one year, then the employee is not entitled to
gratuity benefits. They should have worked for at least 190 days in a mine or coalfield-
like establishment (where the duration of work is only 6 months) and 240 days in other
areas.
Recently, a question arose before the Supreme Court of India about whether the services
provided by the employees were regularised or not and whether they were entitled to a
gratuity amount or not in the case of Netram Sahu v. State of Chhattisgarh (2018). The
appellant employee had, in all, rendered 25 years and 3 months of service (22 years and
1 month as a daily wager and 3 years and 2 months as a regular work charge
employee). However, the Appellant was not paid the gratuity amount by the State after
his retirement because, out of the total period of 25 years of his service, he worked 22
years as a daily wager and only 3 years as a regular employee. The Supreme Court of
India held that the state should release the gratuity amount to the employee because
the Appellant had actually rendered the service for a period of 25 years. Because the
services were regularised, the appellant was entitled to claim their benefit for a period of
25 years, regardless of the post and the capacity in which he worked for 22 years. This
shows that whether the services were regularised or not, it is of no significance to the
continuous service under the said Act.
The different exceptions that qualify for an employee’s continuous service are described
in Section 2A of the Act.
In a recent judgement, Amreli Nagarpalika v. Manubhai Ebhalbhai Dhandhal (2022), the

Gujarat High Court held that after it has been regularised and taken into account for the
purpose of awarding a pension, an employee is eligible for gratuity for the entire
duration of continuous service. In the current case, there was no argument made to the
controlling authority that the respondent had not provided continuous service as required
by Section 2A of the Payment of Gratuity Act, 1972.
Controlling authority
The controlling authority shall be appointed by the appropriate government for the
proper administration of this Act as per Section 3. The government may also appoint
different controlling authorities for different areas.
Payment of gratuity
According to Section 4 of the Act, an employee is entitled to the payment of gratuity if
they have rendered five years of continuous service upon their superannuation,
retirement, resignation, disablement, or death. However, five years of continuous service
are not mandatory in cases where the termination is due to death or disability. A retired
person is also entitled to a gratuity amount along with his pension. This was held by the
Supreme Court in the case of Allahabad Bank and others v. All India Allahabad Bank
Retired Employees Association (2009), where the Honourable Court held that pensionary
benefits may include both pension amount and gratuity amount, but gratuity amount is a
must to be paid to the employees.
Further, the Act provides for the services rendered for at least 6 months, where the
gratuity amount will be calculated at the rate of fifteen days’ wages based on the rate of
wages last drawn by the employee concerned, provided that the amount paid for the
overtime work will not be considered.
The amount of gratuity shall not exceed Rs. 10 Lakhs.
When does gratuity become payable

A gratuity must be paid to an employee upon termination of employment if he or she has
provided continuous service for five years or more, according to Section 4(1) of the
Payment of Gratuity Act of 1972.
(a) It must be upon his retirement, or
(b) Upon his resignation or retirement, or
(c) Upon his demise or disability brought on by an accident or illness.
In Kothari Industrial Corporation v. Appellate Authority (1997), the Andhra Pradesh High
Court held that a mere absence from work without a valid excuse does not, for the
purposes of this Act, constitute a breach of continuity of service.
To whom the gratuity can be paid

1. In the first case, the gratuity shall be paid to the employee himself.
2. If an employee passes away, any gratuity due to him must be paid to his nominee or,
if no nominee has been made, to his heirs.
3. If either of the above-mentioned parties is a minor, the share of the minor must be
deposited with the controlling authority, who will invest it for the minor’s benefit in the
bank or other financial institution specified until the minor reaches majority, or, if no
nominee has been made, to the employee’s heirs.
What is the threshold limit of gratuity

The employees will benefit from the rise in the gratuity limit from 3.5 lacs to 10 lacs
under Section 4(3). The gratuity cap was also enhanced from Rs. 3.5 lac to Rs. 10 lac in
Section 10(10) of the Income Tax Act, 1961.
However, as of March 29, 2018, the gratuity limit for individuals covered by the Payment
of Gratuity Act, 1972, has risen from 10 lacs to 20 lacs through the notification S.O.
1420 (E) dated March 29, 2018.
Forfeiture of gratuity
Section 4(6) lays down two situations in which an individual’s gratuity can be forfeited:
1. If there has been a termination of service for any act, willful omission or any negligent
act by the individual which caused damage to the property of the employer, the
gratuity shall be forfeited up to the extend of the damage.
2. There can be a partial or whole forfeiture of gratuity for riotous and disorderly
behaviour, any other act of violence committed by him, or any act of moral turpitude
committed by him while acting in the course of his employment.
In the case of Bharat Gold Mines Ltd. v. Regional Labour Commissioner (1986), it was
determined by the Karnataka High Court that, in cases of employee theft involving moral
turpitude, gratuity is wholly forfeited in accordance with Section 4(6)(b). In light of this,
the employer cannot withhold the employee’s owed gratuity when service has not been
terminated for any of the aforementioned reasons.
In the case of Travancore Plywood Industries v. Regional Joint Labour Corporation of

Kerala (1996), it was decided that the employee’s gratuity could not be withheld just
because the employer’s land had not been abandoned by the employee. Therefore,
under Section 4(6) of the Payment of Gratuity Act, 1972, an employee’s unwillingness to
turn over inhabited corporate property is not a sufficient reason to deny gratuity.
According to the Bombay High Court in the case of Air India Ltd. v. the Appellate
Authority (1998), gratuities cannot be withheld from departing employees because they
did not vacate their service quarters.
The question of the procedure for forfeiting gratuities has also been raised in many
cases. The Allahabad High Court held in Hindalco Industries Ltd. v. Appellate Authority
and Ors. (2004) that in accordance with Section 4(6)(a) of the Act, the quantum of
forfeiture must be determined, necessitating an order, which can only be issued after
providing the employee with an opportunity. The Karnataka High Court ruled in Canara
Bank v. Appellate Authority (2012) that the decision to forfeit a gratuity may only be
made after calculating the loss and giving the employee a chance to be heard. The
Gujarat High Court ruled in Union Bank of India v. K.R. Ajwalia (2004) that notice and
hearing are necessary steps in the forfeiture of gratuity process. The Madhya Pradesh
High Court ruled in Manager, Western Coalfields Ltd. v. Prayag Modi (2018) that an
employee’s gratuity may only be withheld in accordance with the Act’s established
procedure. The employer does not have unrestricted authority to decide to withhold the
gratuity at his whim.
In a recent judgement by the Delhi High Court, Union Bank Of India v. Sh D.C.
Chaturvedi (2022), it was observed that the three requirements of notification,
quantification, and hearing must all be met, according to the accepted legal view, before
a gratuity can be forfeited.
Compulsory insurance
Section 4A of the Act provides compulsory insurance to every employer other than those
belonging to the central government or state government through the Life Insurance
Corporation or any other company. However, those employers are exempted from this
provision who have an established and registered gratuity fund in their company. The
government may also make rules for the enforcement of this section as and when
necessary. Any violation of this provision by anyone may lead to a penalty.
Power to exempt
Section 5 of the Act provides the power to exempt the appropriate government by
notification from having to declare any establishment—a factory, mine, oilfield,
plantation, port, railway company, or shop—exempt from gratuity if the government is of
the opinion that the establishment has favourable benefits, not less than what this Act
has been providing. The same law applies to any employee or class of employees.
Nomination
When to file for nomination

A nomination under Section 6 must be submitted by an employee within 30 days of the
end of their first year of employment in order to be considered under the Payment of
Gratuity Act, 1972. This would imply that the statute mandates that an employee submit
a nomination within 30 days after completing a year of service. In reality, though, this is
not the case. In reality, employers demand that new recruits submit the nomination form
when they first join the company. As a result, you can consult your employer if you are
unsure about submitting the nomination form.
Who can be nominated

Only “family members” may be nominated by an employee, and only then may anybody
else be nominated if there are no “family” members.
According to the Gratuity Act, a male member’s “family” is defined as his wife, children
(married or not), dependent parents, dependent parents of his wife, and, if any, the
widow and children of any predeceased sons.
For a female employee, the term “family” refers to her spouse, her children (whether
they are married or not), her dependent parents, her husband’s dependent parents, and,
if any, the widow and any children of her predeceased son.
The Gratuity Act does not provide a female employee with the option to remove her
husband and his dependent parents from the list of nominees, in contrast to the
Employees’ Provident Fund Scheme (EPF), which does. A 1987 Amendment to the Act
removed the possibility of excluding the husband from the definition of family.
Remember that, unlike EPF, gratuity nominations do not end automatically upon
marriage. Given that you would gain a spouse, who would then be considered “family,” if
you had nominated anyone else (assuming you had no “family”), you would need to
submit a new nomination after being married. However, if you designated your
dependent parents before getting married, such designation will remain valid after
getting married, and your company is required to give gratuity benefits to that individual
in the event of your untimely death.
How to nominate
A person’s employer must receive the nomination on Form F on their behalf. If the
employee did not have “family” as defined by the Gratuity Act at the time the initial
nomination was filed but has since gotten married and had children, a new submission
using Form G must be submitted.
Employers should insist that their staff members evaluate their gratuity nomination after
getting married. The earlier nomination submitted (i.e., before gaining family) will be
rendered invalid once the new submission is made.
Can a will override the beneficiary nomination

The laws governing gratuity payments in the event of an employee’s passing are
generally identical to those governing the payment of EPF benefits. It is unlikely that
they would be entitled to the proceeds if you will (i.e., bequeath) your EPF proceeds to
anybody other than the defined “family” members because that is not what the EPF
Scheme contemplates.
When a nomination is legitimately made, the nominee only retains the money on behalf
of the employee’s legal heirs; as a result, the nominee is legally obligated to pay the
gratuity money in accordance with a will or other succession regulations after receiving
it. However, if someone nominates someone who is not “family” (as defined by the
Gratuity Act), the nomination will be void, and even if the person is a beneficiary under
the will, they will not be eligible to collect the gratuity proceeds.
Forms used for nomination

All types of forms are given under the Payment of Gratuity Rules of 1972.
1. Form D – Notice for excluding Husband from family.
2. Form E – Notice of withdrawal of Notice excluding husband from family.
3. Form F – Nomination
4. Form G – Fresh nomination.
5. Form H – Notification of nomination.
According to this Act, it is necessary for the employee to prescribe the name/names of
the nominee soon after completing one year of service. In the case of a family, the
nominee should be one among the family members of the employee, and other
nominees shall be void. Any alteration or fresh nomination must be conveyed by the
employee to the employer who shall keep the same in his safe custody.
Determination of the amount of gratuity

Section 7 of the Act, lays down the rules for the determination of the amount of gratuity.
The person entitled to receive the gratuity amount shall send an application in writing to
the employer. The employer shall calculate the gratuity amount and provide notice in
writing to the concerned employee and the controlling authority. The payment should be
made within 30 days from the date it is due to the employee. Failure to pay within the
prescribed limit will result in the payment of simple interest. However, if the delayed
payment is because of the employee, then the employer is not entitled to pay the simple
interest.
In the landmark case of Y.K. Singla v. Punjab National Bank (2012), the highest Court in
India, the Supreme Court had to decide whether an employee whose gratuity has been
withheld under Regulation 46 of the Punjab National Bank (Employees) Pension
Regulations is entitled to get interest because of the delay after the completion of the
proceeding? The Court held that even though the provisions of the 1995 Regulations are
silent on the issue of payment of interest, the appellant would be entitled to interest, on
account of delayed payment under the Payment of Gratuity Act for the benefit of the
employee.
The disputes arising between the employee and employer shall be referred to the
controlling authority, and the proceedings for their resolution presided over by the
controlling authority shall be considered judicial proceedings. The controlling authority
has the authority to enforce the presence of any person and examine his oath, order the
production of relevant documents, and issue commissions for the examination of
witnesses if required. After due inquiry and giving the parties a reasonable opportunity
to be heard, the controlling authority may determine the matters and pass appropriate
orders. The aggrieved party can apply for appeals to the government.
Calculation of gratuity
The elements that are used to determine the gratuity amount are listed below. The
amount also depends on how long an individual has worked for the organisation and
when he was last paid.
Gratuity = Number of years * last drawn salary *15/26
For instance, if XYZ has been employed by a company for 20 years and received Rs.
25,000 as his most recent basic plus DA amount,
For XYZ, the gratuity amount is equal to 20 * 25,000 * 15/26, or Rs. 2,88,461.54.
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However, a company has the option of giving an employee a larger gratuity. Additionally,
for the number of months in the most recent employment year, everything over six
months is rounded up to the next number, and anything under six months is rounded
down to the previous lower number.
Employees not covered under the Act
The organisation may pay gratuities even if they are not covered by the Act. But for each
year that has passed, a person’s half-monthly wage is used to determine how much
gratuity they will receive. The pay package consists of a base salary, a commission
(depending on sales), and a depreciation allowance.
For employees who are not covered by the Gratuity Act, the following formula is taken
into account while calculating the gratuity amount:
(15 * last drawn salary amount * length of service) / 30 equals the gratuity amount.
For instance, if you have worked for a company for 10 years and 8 months and make Rs.
50,000, the gratuity amount is determined as follows:
Gratuity: (15 * 50,000 * 11) / 30 equals Rs. 2.75 lakh.
An employee’s tenure is counted as one year for purposes of calculation. The previous
number of completed years is taken into account if the number of months worked in the
most recent year is less than six months. However, the year is regarded as a full year for
the purposes of calculation if the number of months completed in the most recent year
of service is greater than six months. Therefore, 11 years have been determined to be
the working period. The number of years of service would have been 10 years only if the
service duration had been 10 years and 4 months (or anything less than 6 months).
Gratuity in case of death of an employee
Service tenure of the

Gratuity payable upon the death
employee
> a year 2 * basis salary of the employee
More than or equal to 1 year

6 * basis salary of the employee
but less than 5 years
More than or equal to 5

years but less than 11 years

years but less than 20 years
For each full six-month term, half of the base salary. It

is limited to a maximum of 33 times the basic salary,
years
though.
Inspectors appointed for the purpose of the Payment of

Gratuity Act and their powers
The government may appoint an inspector or inspectors who are deemed to be public
servants under Section 21 of the Indian Penal Code for the purpose of ascertaining
whether any of the provisions of this Act are being violated or not complied with and
taking the necessary measures to ensure the fulfilment of all the provisions of this Act.
Two additional provisions, Section 7-A and Section 7-B, dealing with the appointment of
inspectors for the purposes of the Act and their powers, have been added to the original
Act by the Payment of Gratuity (Amendment) Act, 1984.
The government, by notification, appoints an inspector for specific areas by designating

them in particular.
The appointed inspector has certain powers to ascertain whether the provisions of the
Act are well complied with. These powers are as follows:
1. The inspector can demand that an employer provide whatever information that he
may deem necessary.
2. He can enter and inspect the premises that come under the Act to examine the
records or necessary documents.
3. He also has a right to inspect the employees on the premises.
4. If he believes that any offence has been committed, then he may also make copies of
the necessary documents that he examined.
5. The individuals are bound to furnish the relevant documents to the inspectors as per
the relevant laws such as Sections 175 and 176 of the Indian Penal Code and Section
94 of the Code of Criminal Procedure, 1973.
Recovery of Gratuity
If the employer delays the payment of the gratuity amount under the prescribed time
limit, then the controlling authority shall issue the certificate to the collector on behalf of
the aggrieved party and recover the amount, including the compound interest decided by
the central government, and pay the same to the person. However, these provisions are
subject to two conditions, as mentioned in Section 8:
The controlling authority should give the employer a reasonable opportunity to show the
cause of such an Act.
The amount of interest to be paid should not exceed the amount of gratuity under this
Act.
Penalties under the Payment of Gratuity Act

Violation of the provisions of the Act shall entail certain penalties, as stated in Section 9.
They are:
1. To avoid any payment, if someone makes a false representation or false statement, it

shall be punishable with imprisonment for 6 months or a fine up to Rs. 10,000 or
both.
2. Failure to comply with the provisions of this Act shall be punishable by a minimum of
3 months, which may extend up to 1 year, or a fine of Rs. 10,000, which may extend
up to Rs. 20,000.
3. Non-payment of gratuity under the Act will lead to an offence, and the employer shall
be punishable with imprisonment for at least 6 months, which may extend up to 2
years unless the court provides a sufficient reason for less payment.
Exemption of employer from liability

An employer, if charged with any offence punishable under this Act, shall be exempt from
any liability under Section 10 if he provides sufficient reasons for his conduct of the act
or some other person doing that act without his knowledge. The other person, if found
guilty, will be charged with the same punishment as an employer will be.
The employer has to prove the following to the court in order to get exempted from
liability:
1. To prove that the other person committed the alleged offence without his knowledge,
agreement, or connivance, and
2. To prove that he exercised due diligence in enforcing the execution of this Act.
Cognizance of offences as per the Payment of Gratuity

Act
As per Section 11, the court cannot take cognizance of the offences punishable under
this Act unless the amount of gratuity to be paid has not been paid or recovered within 6
months from the expiration of the prescribed time. In such cases, the government shall
authorise the controlling authority to make a complaint where the authority has to make
a complaint to the metropolitan magistrate or judicial magistrate of first class within 15
days of the authorisation.
Protection of action taken in good faith

The controlling authority shall not be subject to any legal proceeding if the acts done by
him were done in good faith or under any rule or order under Section 12 of the Act.
Protection of gratuity
As per Section 13, no exempted gratuity that is payable under this Act to the employee
by the employer shall be liable to the attachment of any order or decree by any court.
Act to override other enactments

As per Section 14, since the Payment of Gratuity Act is complete in itself, this Act has an
overriding effect on all provisions, regulations, and statutes relating to gratuity. The
landmark case for this provision is the University of Delhi v. Ram Prakash and Ors.
(2015), which states that any provision that is more beneficial for the employees should
be considered to have an overriding effect.
Power to make rules

The power to make rules under Section 14 of the Payment of Gratuity Act, 1927, shall
rest with the appropriate government and be declared by notification.
Validation of amendments made in this Act

The rules made have to be presented before both houses of parliament when they are in
session. If both houses are in conformity with the annulments or modifications, then
they shall be applicable immediately; otherwise, such modifications will have no effect.
2022 Gratuity Rules

On July 1, 2022, the new labour law went into effect for all businesses and
organisations. The working hours, Provident Fund, and in-hand salary were decreased in
accordance with the new labour law. This law will have the most effect on take-home
salaries.
According to the new gratuity rules of 2022, employers must make sure that basic pay
makes up 50% of an employee’s CTC (cost to the company) and that employee
allowances, house rent, and overtime make up the remaining 50%. Additionally, any
additional allowances or exemptions that the corporation grants that go beyond 50% of
the CTC will be regarded as compensation.
The law restricts the highest basic pay to 50% of CTC, which raises the required gratuity
bonus for employees. Based on a significant wage basis that comprises basic pay and
allowances, the gratuity amount will be decided.
Further, the new rules state that when an employee works overtime, which is defined as
working for 15 minutes or more, they are paid. The work capacity is capped at 48 hours,
according to the government.
Tax calculation of gratuity after the latest rules
As part of their remuneration package, salaried workers are entitled to gratuities. The
Payment of Gratuity Act of 1972 regulates the payment of gratuities, which are defined
benefits given to employees in a lump sum upon retirement. It resembles a thank-you
present given to employees as a parting gesture.
When a person has worked for an organisation for five years in a row, they are eligible
for a gratuity payout. As a result, gratuity may be paid at the time of retirement or
termination or to the employee’s legitimate heir in the event of death. However, the 5-
year continuous rule condition is not required in cases of an employee’s death.
The Centre recently passed an amendment in 2019 that raised the gratuity cap. Since
Section 10(10) of the Income Tax Act raised the previous limit of Rs 10 lakh, it is now
tax-exempt up to Rs 20 lakh. The exemption limit of Rs 20 lakh will be applicable to
employees in the event of retirement, death, resignation, or disability on or after March
29, 2018, according to CBDT Notification No. S.O. 1213(E), dated March 8, 2019.
According to Section 10(10) of the Income Tax Act, both government and non-
government employees are entirely liable for any gratuities they receive while working.
Any gratuity received during work is fully taxable in the hands of the employee. However,
the government employees, the Centre, or the state, are exempt from paying tax on the
gratuity amount received by the government. However, statutory corporations are not
exempted. Employees who get a death-cumulative-retirement gratuity, however, can be
divided into three groups. Government employees, those protected by the Payment of
Gratuity Act, 1972, and other employees are all included in this division.
If someone wants to know more about how to calculate income taxes in India, they can
click here.
Conclusion
The Payment of Gratuity Act, 1927, is a welfare statute provided for the welfare of the
employees, who are the backbone of any organisation, company, or startup. The gratuity
amount encourages the employee to work efficiently and improve productivity. Recently,
by the Payment of Gratuity (Amendment) Act, 2018, the central government has tried to
promote social welfare by providing leverage to female employees who are on maternity
leave from ‘twelve weeks’ to ‘twenty six weeks.’
However, the scope of this Act is limited to large-scale companies or organisations and is
not applicable to organisations where the number of employees is less than 10. Yet, the
Act in its entirety is complete, and therefore it overrides other Acts and statutes in
relation to gratuity. The only need of the hour is to change or modify the implementation
of the Act as this Act is still not followed by many companies or corporations.
Frequently Asked Questions (FAQs)
Am I entitled to a gratuity if I leave a company after 4.5

years of employment?
No, in order to receive a gratuity, you must work for a company for at least 5 years.
According to a Madras High Court decision, you are eligible for gratuity if you have
served 240 days in your fifth year of employment. It is better to inquire about this with
your company’s HR department. However, even if they have not yet served for five years
if someone passes away while still on the job, the gratuity sum will be paid to their legal
heir. Additionally, a nominee’s or heir’s inheritance won’t be taxed.
Is the maximum gratuity I may earn capped?

Yes. Regardless of how many years you have worked there, a company cannot pay you a
gratuity of more than Rs. 10 lakh. This restriction also applies to any gratuities you may
get from several employers throughout the course of your career. If your employer wants
to give you a bonus or ex-gratia payment, they may do so.
What are the new gratuity policies for employees in the

private sector?
Employers are required to increase employees’ base salaries by 50% in order to comply
with the new gratuity legislation. The employer’s payment on manpower gratuity, which
is given to workers who have been employed by a company for more than five years, will
grow if the allowance is limited to 50% of the total income.
How to report non-payment of gratuity?

When filing a complaint about not receiving gratuities, remember the following:
1. The Payment of Gratuity Act of 1972’s Section 3 mandates that a controlling authority
is responsible for handling the situation. It is allowed to arbitrate issues involving the
non-payment of gratuities, according to this Section;
2. The controlling authority provides forms that must be completed in order for both the
employer and the employee to appear at the hearing on the specified date and
location.
3. The authority will continue with the employee’s hearing if the employer is not present;
4. The employee’s claim will be rejected if they fail to show up.
References
https://pib.gov.in/newsite/PrintRelease.aspx?relid=178218
https://www.vakilno1.com/legal-news/sc-what-continuous-service-payment-gratuity-
act.html
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5/22/23, 6:03 PM Payment of Gratuity Act, 1972 - iPleaders

It has been published by Rachit Garg.

Scope and objective of the Payment of Gratuity

Key provisions of the Payment of Gratuity Act,

Applicability of the Act

Further, the Act shall be applicable to the following:

Who is an employee under the Payment of Gratuity Act

An employee is defined in Section 2(e) as any person who is paid wages in an

In a recent judgement, Amreli Nagarpalika v. Manubhai Ebhalbhai Dhandhal (2022), the

The amount of gratuity shall not exceed Rs. 10 Lakhs.

When does gratuity become payable

(a) It must be upon his retirement, or

(b) Upon his resignation or retirement, or

(c) Upon his demise or disability brought on by an accident or illness.

To whom the gratuity can be paid

What is the threshold limit of gratuity

In the case of Travancore Plywood Industries v. Regional Joint Labour Corporation of

When to file for nomination

Who can be nominated

Can a will override the beneficiary nomination

Forms used for nomination

1. Form D – Notice for excluding Husband from family.

2. Form E – Notice of withdrawal of Notice excluding husband from family.

4. Form G – Fresh nomination.

5. Form H – Notification of nomination.

Determination of the amount of gratuity

Gratuity = Number of years * last drawn salary *15/26

Employees not covered under the Act

Gratuity: (15 * 50,000 * 11) / 30 equals Rs. 2.75 lakh.

Gratuity in case of death of an employee

Service tenure of the

> a year 2 * basis salary of the employee

More than or equal to 1 year

More than or equal to 5

More than or equal to 11

For each full six-month term, half of the base salary. It

Inspectors appointed for the purpose of the Payment of

The government, by notification, appoints an inspector for specific areas by designating

3. He also has a right to inspect the employees on the premises.

Penalties under the Payment of Gratuity Act

1. To avoid any payment, if someone makes a false representation or false statement, it

Exemption of employer from liability

Cognizance of offences as per the Payment of Gratuity

Protection of action taken in good faith

Act to override other enactments

Power to make rules

Validation of amendments made in this Act

2022 Gratuity Rules

Tax calculation of gratuity after the latest rules

Frequently Asked Questions (FAQs)

Am I entitled to a gratuity if I leave a company after 4.5

Is the maximum gratuity I may earn capped?

What are the new gratuity policies for employees in the

How to report non-payment of gratuity?

4. The employee’s claim will be rejected if they fail to show up.

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