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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.

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