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Gratuity Simplified

April 16, 2012

This is a Guest post by Sai kumar, an HR professional with three decades of experience in the field of labour laws and industrial relations in a public sector as well as in a reputed labour law firms. 

Prior to enactment of the Payment of Gratuity Act 1972, gratuity was considered as a gift or bounty given by the employer to express his appreciation for the services of an employee at the time of leaving the service. Since the enactment of the Act, gratuity is being increasingly looked up on as the right  of the employee to his property lying in the hands of the employer to be claimed in future. However the Act, while imposing obligations on the employer, made it also clear that gratuity is subject to good conduct. Therefore it is necessary to know the basic frame work of the applicability and eligibility under the Act.

1. What establishments are covered by the Act?

The Act covers the following establishments ;

I)Factories employing ten or more workers if they are run with power or twenty or more workers without power.

2)Mines, oil fields and Plantations which are so defined under the relevant Acts.

3) Shops and commercial establishments employing ten or more persons on any day during the preceding twelve months.

However the Central Government can extend the application of the Act to any other establishment.

2. Who are excluded?

The central Government and State Government establishments are excluded from the Act.

3. Since there is always employee turn- over,  what happens if the number  of employees fall below ten at any time?

As per Sec.1(3-A), once the Act applies to an establishment, it continues to apply to it even after the fall in the number below ten employees.

4. Who are covered?

Sec.2(e) defines an “employee”. All employees whether they are workmen performing manual, skilled or semiskilled, unskilled, technical supervisory or clerical work or those performing managerial or administrative functions are covered. After broad basing the definition of employee  by amending the section recently, even teachers are also covered.

5. Is there any wage limit for coverage of employees?

No. The Act does not prescribe any wage limit unlike the P.F Act or ESI Act.

6. When an employee becomes eligible to claim gratuity?

An employee becomes eligible to claim gratuity on any of the following grounds after completing five years of continuous service.

I)       On attaining the age of superannuation or retirement

II)    On resignation

III)  On death even before completion of five years and

IV) On acquiring disability due to accident or disease even before completion of five years.

7. Whether an employee who resigns or leaves  the job  or due to closure before completing fifth year, can also claim gratuity?

Yes. An employee who could not complete the fifth year for any of the reasons but completes four years and 240 days (8months) is considered under law as having completed fifth year also and becomes eligible for gratuity.

8. How to compute gratuity?

Gratuity is to be computed at the rate of fifteen days wages last drawn by an employee for each completed year of service and service in excess of six months to be treated as one year as per the formula given below.

Monthly wages last drawn/26  x 15 x  no. of years of service

 9. What is the maximum limit for payment of gratuity?

It is now Rs.10,00,000/-

10. Can gratuity be attached?

No . It cannot be attached

11. What precautions to be taken  in making nomination?

i)       The employee shall submit nomination in the proper prescribed form within 30 days of completion of one year of service..

ii)     If employee has a family at the time of making nomination, they shall nominate only a member of their family not any one else since such nomination becomes invalid.

iii)   If they have no family at the time of making nomination, they can name any person as their nominee but on acquiring family, they shall modify or change the nomination in favour of his family member.

iv)  they shall duly sign the nomination form.

 12. Gratuity is subject to good conduct

Gratuity does not become payable automatically but is subject to good conduct. This fact is espoused by section 4(6) of the Act.

A)   The employer can forfeit gratuity either fully or partially in the following cases irrespective whether there is any financial loss or damage caused to the employer or not :

i)       if the employee indulges in disorderly or riotous behavior

ii)    if the employee is guilty of moral turpitude.

B)    The employer can forfeit gratuity to the extent of financial loss, if it is caused by  ;

i)        an omission of the employee or

ii)       negligence of  the employee

provided the employee is found guilty of the same in either of the above cases in a domestic enquiry

 13. Important obligations of the employer under the Act

a) With regard to insurance and registration

The employer has to obtain insurance cover for the gratuity that becomes payable and register his establishment with the Controlling Authority.

b) with regard to payment

i) As soon as the gratuity becomes payable, employer shall calculate the amount and  keep it ready

ii) On receipt of application of the employee , they shall inform the employee in the prescribed form whether or not gratuity is payable to him

iii) If gratuity is payable to an employee, the employer shall pay it within 30 days from the date it becomes payable.

c) with regard to display  on notice board

i) Employer shall display the name of the officer with designation, in bold letters in English or in the language understood by majority of employees at a prominent place, who can receive notices under the Act and rules on behalf of the employer.

ii) The employer has to display an abstract of the Act and Rules in the prescribed form in English or in the language understood by majority of employees at a prominent place.

d)  with regard to nomination

Employer shall obtain nomination form from an employee who completes one year of service  or any change thereof in the form prescribed under the rules

14. Important obligation of the employees

 i)       The employee shall make an application in the prescribed form as soon as he leaves the service so as to enable the employer to settle his claim at the earliest.

ii)     He shall submit the nomination form in the prescribed form on completion of one year or intimate any change in it also in the prescribed form.

iii)   He shall maintain good conduct during the tenure of his service to be eligible for gratuity.

15. Remedy against non – payment or short payment of gratuity

An employee aggrieved by either non-payment or short payment of gratuity can file an application before the Controlling Authority notified under the Act and thereafter, if any party is aggrieved by the decision of the  Controlling Authority, can make an appeal to the appellate authority.


Sai Kumar has been  involved  extensively in research on labour law issues and case-law  on subjects such as the Industrial Disputes Act, the Standing Orders Act, the Factories Act, the Contract Labour Act, the P.F Act, the ESI Act  and the Gratuity Act etc

  1. Venkataramana
    October 9, 2013 at 4:57 pm

    Sir, I worked in a company for 7 years. My date of birth is 1.8.1951. I joined that organisation on 14.11.2005 and left on 31.12.2012. Am I eligible for Gratuity? I was told that i put in service only 2 years for gratuity calculation and not eligible> Is this correct. Pls reply
    Thanks Envy

    • November 20, 2013 at 9:19 am

      Reply from the Author – An employee who puts in five years of service is eligible for gratuity as per Sec.4(1) of the Payment of Gratuity Act 1972, provided your company is covered by the said Act. Your eligibility needs to be determined on the facts and terms of employment in your case . Please consult a labour law consultant/ advocate with all the details of your case.

  2. Rajni Soni
    September 16, 2013 at 8:01 pm

    Hi, i joined organisation on 9 feb 2009 & resigned on 14 september 2013 i wanted to ask am i eligible for gratuity

    • November 18, 2013 at 1:05 pm

      Reply form the Author – You seem to have completed 4 years and 198 days. To ascertain your eligibility, please refer to Sec.2A of the Payment gratuity Act 1972

  3. ramakrishnan
    April 3, 2013 at 4:46 pm


    • April 17, 2013 at 7:36 pm

      Reply from the Author- @Ramakrishnan- There is no such rule under Central Rules in Gratuity Act. If there is any such compulsive provision under A.P.State Gratuity Rules or under any State law, you need to refer to it or get it confirmed from the Controlling Authority/Labour commissioner of the State

  4. January 26, 2013 at 12:42 pm

    Iam a public sector bank officer,retired during 2007 and my employer paid me gratuity
    of Rs.3.5lakhs being the maximum payable at the material time.However,the rule is amended to maximum of Rs.10lakhs with back effect.Whether I am eligible for the enhanced amount.

    • Priyanka Kaswankar
      March 20, 2013 at 3:18 pm

      HI i have question ,My day will get retired in few years and he has completed his servive of 27 years, i have just heard that if one employee comples 30 yrs of servive he would get a gradutity of 10,000,00 RS. can someone please confirm

      • March 26, 2013 at 1:28 pm

        @Priyanka – Reply from the Author- It is not so. if the gratuity calculated for 27 years of service is equivalent to ten lakh or more , then only a person can get ten lakh, other wise he will be eligible only for such lesser actual amount as was calculated as above

  5. Mangesh Nilkant Wakodkar
    April 18, 2012 at 4:43 pm

    Is it mandatory to get insured for gratuity?
    What then approved gratuity fund means?

    Mangesh Wakodkar

    • saikumarb
      April 19, 2012 at 11:15 am

      @Mangesh- yes.it is manadatory under Sec.4-A of the Act. an approved gratuity fund is one instituted by the employer with it’s own Trust and he can claim exemptionfrom insurance.

    April 17, 2012 at 8:20 am

    Is it the Sai Kumar, who was associated with Hindustan Motors Ltd, Earthmoving Equipment Divn, about 20-22 years ago?

    • saikumarb
      April 18, 2012 at 5:47 pm

      No sir. Mr Saikumar was never associated with Hindustan Motors. Thank you!

  7. vijay
    April 16, 2012 at 9:55 am

    Excellent. Though we know what Gratuity process…. the post helped to fillup the gaps..and update our knowledge….

    • April 17, 2012 at 10:17 am

      Thanks Vijay. The aim was to simplify this topic. Nice to know that it is helpful.

  1. June 24, 2012 at 11:01 pm
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