The Payment of Gratuity Act, 1972
In India gratuity is a kind of retirement benefit. It is a payment made with the intention of helping an employee monetarily after his retirement. It was held by the Supreme Court of India in Indian Hume Pipe Co Ltd v Its Workmen, that the general principal underlying gratuity scheme is that by service over a long period the employee is entitled to claim a certain amount as retirement benefit. The Payment of Gratuity Act was passed by Indian Parliament in 21 August 1972. The act came in force on 16 September 1972.
Application and Extent of This Act -
The act applies to the whole of India. But according to section 1(2), in so far it relates to plantation or ports, it shall not be extended to State of Jammu and Kashmir. The act applies to all factories, mines, oilfield, plantation, port and railway company. But in case of shops or establishments other than those stated before, it applies to those organisations with 10 or more persons are employed on any day of the preceding 12 months. Under Section 1(3-A), if in case of any shop and establishment to which the act applies the number of employee reduces below 10, it shall continue to be governed by the act irrespective of the number of employee's. Thus no employer can escape liability under this act by reducing the number of employee's. Under Section 2(e), Nothing in this act applies to Apprentices and Persons who hold civil posts under the Central Government or State Government and are subjected to any other act or rule other than this act.
Payment of Gratuity : Payability and Calculation -
Under Section 4, payment of gratuity is mandatory. Gratuity shall be payable to an employee on termination of employment after he has rendered continuous service for not less than 5 years in a single organisation. The termination can be due to :
- Superannuation.
- Retirement or Resignation.
- On Death or Disablement due to accident or disease.
As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or disablement. In such case mandatory gratuity is payable.
Gratuity is paid at a rate of 15 days wages for every completed year of service or part thereof in excess of Six months. The wages here means wages last drawn by the employee. The "15 Days Wages" will be calculated by dividing the last drawn wages by 26 and multiplying the result with 15. But under section 4(3), the maximum gratuity that is payable is fixed at Rupees 20,00,000 [1].
Formula for Gratuity Calculation = [((Basic Pay + D.A) x 15 days) / 26] x No. of years of service (example of Gratuity Calculation).
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