Skip to main content

Gratuity

 Introduction

Gratuity is a financial benefit given by an employer to an employee as a reward for long and continuous service. It is governed by the Payment of Gratuity Act, 1972, which was enacted by the Indian Parliament to provide a uniform law for payment of gratuity to employees in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments. The Act came into force on 16th September, 1972.

Meaning of Gratuity

The word "gratuity" comes from the Latin word "gratuitus" meaning free or given without return. In labour law, gratuity is a lump sum payment made by the employer to the employee at the time of retirement, resignation, death, or disablement. It is a recognition of the employee's long service and loyalty to the organization.

Legal Provision — Payment of Gratuity Act, 1972

Section 4 of the Payment of Gratuity Act, 1972 deals with the payment of gratuity. It states that gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years.

Who is Eligible for Gratuity?

Under the Payment of Gratuity Act, 1972, an employee is eligible for gratuity if:

  1. He has completed minimum 5 years of continuous service with the same employer
  2. His employment is terminated due to:
    • Superannuation (retirement on reaching retirement age)
    • Resignation
    • Death (in this case, the 5-year minimum does not apply)
    • Disablement due to accident or disease (5-year minimum does not apply here either)

Calculation of Gratuity

The formula for calculating gratuity under the Act is:

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

Here, 15 represents 15 days of salary for each completed year of service, and 26 represents the number of working days in a month.

Example: If an employee's last drawn salary is ₹20,000 per month and he has worked for 10 years: Gratuity = (20,000 × 15/26) × 10 = ₹1,15,384 approximately.

Maximum Limit of Gratuity

As per the 2018 amendment to the Payment of Gratuity Act, the maximum amount of gratuity payable is ₹20 lakhs (increased from the earlier limit of ₹10 lakhs).

Forfeiture of Gratuity

Under Section 4(6) of the Act, gratuity can be wholly or partially forfeited if the employee:

  • Has been terminated for misconduct causing damage or loss to the employer's property
  • Has been terminated for riotous or disorderly conduct

Important Case Law

In Mettur Beardsell Ltd. v. Regional Labour Commissioner (1998), the Madras High Court held that gratuity is not a bounty or gift but a statutory right of the employee and must be paid as per the provisions of the Act.

Conclusion

Gratuity is an important social security measure provided under Indian labour law. The Payment of Gratuity Act, 1972 ensures that employees who have devoted years of their life to an organization are financially protected when they leave service. It is a right, not a privilege, and the law makes it mandatory for employers to honour this obligation.

Labels:

Comments

Post a Comment

Popular posts from this blog

Personal Injury

Introduction The concept of Personal Injury is one of the most important topics under the Employees' Compensation Act, 1923 (formerly known as the Workmen's Compensation Act, 1923). This Act was enacted by the Indian Parliament to provide financial protection to workers who suffer injuries during the course of their employment. The Act makes it a legal duty of the employer to pay compensation to his employees when they suffer a personal injury caused by an accident arising out of and in the course of employment. Meaning of Personal Injury The term "personal injury" is not directly defined in the Employees' Compensation Act, 1923, but it has been interpreted widely by Indian courts over the years. In simple terms, personal injury means any bodily harm caused to a workman as a result of an accident that happens while he is doing his job. Personal injury includes: Physical injuries such as broken bones, burns, or loss of limbs Injuries to internal organs ...
Post a Comment
Read more

Contract of Indemnity

Contract of Indemnity Introduction In daily life and business activities, risks and losses are common. To manage these risks, people often enter into agreements where one promises to protect the other from potential losses. In law, such an agreement is called a Contract of Indemnity . It plays an important role in building trust between individuals, businesses, and institutions. This concept is especially important in sectors like insurance, agency work, and business contracts. The Contract of Indemnity is governed under the Indian Contract Act, 1872 , specifically under Section 124 . Definition According to Section 124 of the Indian Contract Act, 1872 : "A contract of indemnity is a contract by which one party promises to save the other from any loss caused to him by the conduct of the promisor himself or by the conduct of any other person." In simple words, a contract of indemnity means one person promising to compensate another person for the losses suffered ...
Post a Comment
Read more

Explain the Reforms in Law — GST

The Goods and Services Tax (GST) is undoubtedly the most significant tax reform in India since independence. It was introduced on 1st July, 2017 through the Constitution (One Hundred and First Amendment) Act, 2016 , which amended the Constitution of India to enable the levy of GST. GST replaced a complex, multi-layered system of indirect taxes with a single, unified, comprehensive tax on the supply of goods and services throughout India. It is often described as "One Nation, One Tax, One Market" — reflecting its transformative impact on India's taxation system. GST is a destination-based consumption tax levied on the value added at each stage of the supply chain. It is collected at every stage of production and distribution but the tax burden ultimately falls on the final consumer . Businesses that collect GST from their customers can claim credit for the GST they have already paid on their inputs — this is called the Input Tax Credit (ITC) mechanism, which is the ...
Post a Comment
Read more