PAYMENT OF GRATUITY ACT,1972
Payment of Gratuity Act, 1972, originally mandated gratuity payments for long-serving employees in specified establishments, but the new Labour Codes, including the Code on Social Security, 2020, have integrated and updated its key provisions, reducing eligibility thresholds and expanding coverage. These changes aim to simplify labor laws while enhancing worker benefits. Below is a detailed explanation structured around the original Act and its evolution under the new codes as of 2026.
Original Act Overview
The Payment of Gratuity Act, 1972, enacted on August 21, 1972, and effective from September 16, 1972, provides a statutory right to gratuity—a lump-sum payment—as a token of appreciation for employee service. It applies to factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments employing 10 or more workers on any day in the preceding 12 months. Employers must notify the controlling authority upon becoming applicable and continue obligations even if employee numbers drop below 10.
Gratuity eligibility required five years of continuous service, excluding cases of death or disablement due to accident or disease. Continuous service includes periods of layoff, leave, lockout, or strike not caused by the employee, ensuring service continuity despite interruptions. The Act empowers the government to notify exemptions for specific employees or establishments.
Coverage and Applicability
Under the original framework, coverage extended to a wide range of sectors but excluded apprentices and contractual workers unless specified. Establishments like factories under the Factories Act, 1948, or shops under state shop acts fell under its ambit. The Central Government oversees mines, oilfields, and major ports, while state governments handle others.
Post the four Labour Codes—Industrial Relations Code, 2020; Code on Social Security, 2020; Occupational Safety, Health and Working Conditions Code, 2020; and Code on Wages, 2019—gratuity provisions consolidated primarily into the Code on Social Security. Effective by 2026, these codes subsume 29 older laws, including the 1972 Act, broadening applicability to all establishments regardless of size in some cases, and including fixed-term employees (FTEs) after just one year of service. This shift promotes formalization, direct hiring, and reduces contractualization.
Eligibility Criteria
Employees qualify for gratuity upon superannuation, retirement, resignation, death, or disablement after completing five continuous years, with death/disablement waiving the minimum period. The new codes lower this to one year for FTEs, aligning with modern employment patterns like short-term contracts. Nominees or legal heirs receive payments in case of death, prioritizing spouses, children, or dependents.
Service calculation treats part-years exceeding six months as full years; suspensions or closures do not break continuity. Seasonal workers receive gratuity at seven days’ wages per season worked. Under updated rules, overtime (beyond 15 minutes, capped at 48 hours weekly) factors into wage calculations, potentially increasing payouts.
Gratuity Calculation
Gratuity equals 15 days’ wages per completed year or part exceeding six months, based on last-drawn wages (basic + dearness allowance). Formula: (Last drawn salary × 15/26) × years of service, where monthly salary divides by 26 for daily rate. Piece-rated employees use three-month average wages; seasonal workers get seven days per season.
| Employee Type | Calculation Basis | Example (Monthly Salary ₹30,000, 10 Years) |
| Monthly Rated | Last drawn / 26 × 15 × years | (30,000/26) × 15 × 10 = ₹1,73,077 |
| Piece-Rated | 3-month average / 26 × 15 × years | Varies by average |
| Seasonal | 7 days’ wages per season | Lower rate for partial year work |
The ceiling rose from ₹10 lakh to ₹20 lakh via notifications, with codes allowing further indexation. New codes expand “wages” to include more allowances (up to 50% of CTC as basic), boosting calculations on a higher base.
Payment Process
Employers pay within 30 days of eligibility; delays attract 10% simple interest annually from due date. Employees apply in writing; employers notify the controlling authority and pay promptly. Forfeiture occurs for willful omission, destruction of employer property, or riotous acts, limited to established damage amounts.
Authorities (Assistant Labour Commissioners) handle disputes, recover dues as arrears of land revenue, and impose penalties: up to ₹10,000 fine or six months’ imprisonment for non-compliance. New codes mandate employer registration with the facilitator portal for seamless processing.
Key Changes in Labour Codes
The Code on Social Security, 2020, integrates gratuity seamlessly, extending benefits to gig workers and platform employees via welfare boards. Eligibility drops to one year for FTEs, pro-rated gratuity applies, and payment timelines tighten to 30 days with interest penalties. Wage definitions align with Code on Wages, including bonuses and incentives, raising average payouts.
Employers gain flexibility in FTE hiring without five-year proration fears, encouraging formal jobs. Caps remain adjustable by notification, currently ₹20 lakh, with disputes resolved via tribunals. Health checkups, WFH provisions, and minimum wages in other codes indirectly support gratuity contexts.
Administration and Rules
Controlling authorities oversee notices, registers, and nominations; employers display abstracts and maintain service records. Central Rules, 1972, detail forms for applications, appeals (within 60 days to appellate authority), and inspections. Codes digitize this via unified portals, reducing paperwork.
Penalties escalate for repeat offenses, but good-faith delays due to employee faults exempt interest. Landmark judgments, like those affirming service continuity during layoffs, persist under codes.
Benefits and Implications
Gratuity fosters loyalty, providing retirement security; codes enhance accessibility for shorter tenures, aiding youth and migrants. Employers face higher costs from expanded wages but gain compliance simplicity. Workers benefit from faster payments and broader coverage, aligning India with global standards.
Challenges include awareness gaps and small-firm burdens, addressed via government campaigns. Overall, the transition from the 1972 Act to codes modernizes social security, ensuring gratuity as a robust safety net.
