- Definition and basics
Gratuity is a monetary benefit to be given by the employer to an employee on the occurrence of any of the following events:
a. On his retirement or resignation where the employee has completed a minimum of five years in service.
b. On the death or disablement due to accident or disease (the condition of minimum service of 5 years would not apply in the case of death or disablement of the employee)
c. It is not available for apprentices.
The provisions of gratuity are governed by the Payment of Gratuity Act, 1972.
According to the Payment of Gratuity Act, any individual – working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months – is entitled to gratuity.
Furthermore, once the Act becomes applicable to an employer, even if the number of employees goes below 10, gratuity is still applicable.
- Amendment to Law
The Payment of Gratuity (Amendment) Act, 2018 removed the upper cap prescribed by Section 4(3) of the Act and empowered the government to raise the limit of tax-free gratuity so that the limit can be revised from time to time keeping in view the increase in wage and inflation besides other factors including the recommendations of future pay commissions.
- Present day upper limit
On February 1, 2019, thus India’s interim budget hiked the tax-free gratuity limit to ₹30 lakhs, which remains applicable as on date when this Article is being published in the third week of June 2020. The government had earlier doubled the tax-free gratuity to ₹20 lakh in March 2018.
- Gratuity calculation formula
The least of the following shall be payable and is exempt from tax:
Last salary (basic + DA) multiplied by number of years of employment to be multiplied by 15 to be divided by 26.
₹30 lakhs (which has been hiked from ₹20 Lakhs as per the amendment)
- Key Change as per the amendment
The second important amendment brought about by the Payment of Gratuity Amendment Act, 2018 resulted in enhancement of the maximum maternity leave period to 26 weeks against the backdrop of the Maternity Benefit (Amendment) Act, 2017 and the entire duration of a female employee's statutory maternity leave to be considered while calculating continuous period of service for gratuity payments in line with the entitlement of maternity leave under the Maternity Benefit Act, 1961.
- Whether any Employer can escape liability to pay Gratuity?
Section 7(2) of The Payment of Gratuity Act, 1972 mandates that “As soon as gratuity becomes payable, the employer shall, whether an application referred to in sub-section (1) has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the controlling authority specifying the amount of gratuity so determined.”
The above provision of law makes it obligatory for the employer to adhere to it and even if there is no application by the claimant, release the amount of Gratuity, if the employee is otherwise eligible for payment of Gratuity.
- Judicial Precedents
In terms of the ratio of the Judgment, referring to the above said provision of law, in the case of P. Rama Rao and etc. etc. Vs. Controlling Authority under the PG Act & ALC (C), Vijayawada & Ors. [1996 LAB I.C. 2765], the Hon’ble High Court of Andhra Pradesh ruled that the right of the employee to draw the amount of gratuity cannot be extinguished owing to any technical grounds including limitation.
It was also held by the Hon’ble Bombay High Court in the case of United India Insurance Co. Ltd. etc. Vs. H.K. Khatau and Others [1984 LAB I.C. 33] that the employee can claim gratuity under the Act even when the provisions for payment of gratuity under the service conditions were absent.
In view of the above, it can be safely said that no Employer can escape the liability of payment of gratuity to an employee otherwise eligible for that under the Act.
- Application for Payment of Gratuity to the employer
An employee upon becoming entitled to it in terms of Section 4 (1) of the Act, therefore may make an application to the employer for payment of gratuity under section 7 of the Act read with Rule 7 (1) of the Payment of Gratuity (Central) Rules, 1972 in Form ‘I’ to the employer within 30 days of the date of superannuation or retirement.
It may be noted, however, that the said period of 30 days, as prescribed, was held to be merely procedural in terms of the ratio of the Judgment by the Hon’ble Bombay High Court in the case of Ramjilal Chimanlal Sharma Vs. Elphinston Spinning & Weaving Mills Co. Ltd. [1984 Lab IC 1703] that would not debar the right of the employee to claim gratuity.
If the employer fails to pay the Gratuity, the employee can file an application under section 8 of the Act read with Rule 10 of the Payment of Gratuity (Central) Rules, 1972 to the Controlling Authority in Form ‘N’ for recovery of the dues relating to the Payment of Gratuity together with compound interest as arrears of land revenue and pay the same to the person entitled thereto within 90 days of the occurrence of the cause.
It therefore transpires that:
- Payment of Gratuity Act is a welfare legislation guided by the objective of monetary benefit to be given by the employer to an employee on his retirement or resignation where the employee has completed a minimum of five years in service.
- No employer can escape the responsibility of paying gratuity to an employee who is otherwise eligible for the same; and
- There is a well-defined remedy under the law for claiming Gratuity from a non-compliant and defaulting employer.
For further interactions, please email:
Mr. Rakesh Taneja
Advocate, Supreme Court of India