The Payment of Gratuity Act, 1972 envisages to provide a retirement benefit to the workmen who have rendered long and unblemished service to the employer, and have thus contributed to the prosperity of the employer. Gratuity is a reward for long and meritorious service. The significance of this Act lies in the acceptance of the principle of gratuity as a compulsory, statutory retrial benefit.

Scope and Coverage
Extends to whole of India and is applicable to

a) Every factory, mine, oil filed, plantation, port and railway company
b) Every shop or establishment governed by the shops and Establishments Act of that State, in which     10 or more persons are or were employed on any day of preceding 12 months.
c) Any other shop or establishment so notified by Central Government. Sec 1(3)

Also applicable educational institutions, trusts and societies, motor transport undertakings, clubs, chamber of commerce and industry associations, Federation of Chambers of Commerce & Industry, local bodies & solicitors offices.

Different departments or branches, situated in same place or different places to be treated as part of the same establishment.

Once Act is applicable which shall continued to be governed by the Act, irrespective of number of employees.

Not applicable to apprentices and persons holding post under Central or State Government governed by any other Act or any other rule providing for payment of gratuity.

Exemptions
Appropriate Government is empowered to exempt, by notification if the Government is of the opinion that the employees of such establishment are in receipt of gratuity or pensionary benefits not less favourable than the benefits confirmed under the Act. It may also exempt any employee or class of employees, similarly. Sec. 5

Employees Entitled
Every employee irrespective of wages after rendering continuous service of 5 years or more. Gratuity payable at the time of termination of his services, either on
i) Superannuation
ii) on retirement or resignation iii) On death or disablement due to accident or disease.
Includes retrenchment. 5 years continuous service not necessary if termination due to death or disablement.
Meaning of disablement - Permanent inability or incapacity of an employee to do the work, which he was capable of doing before the accident or disease.
In case of death of the employee gratuity payable to his nominee or legal heir.
Note : Reckitt & Colman of India v/s Fifth Industrial Tribunal 1980 -1 LLN 129; 1977(51) FJR102.

Continuous Service
i) He has been in uninterrupted service, including service interrupted by sickness, accident, absence from duty with or without leave, lay-off, strike or lock-out or cessation of work not due to the employee's fault.
Note : Jewan Lal (1929) Ltd. v/s Controlling Authority (CA) under payment of Gratuity Act 1982 -1 LLN 217.
ii) In case of mine or a non-seasonal establishment working for less than 6 days in a week, he has actually worked for at least 190 days during the preceding 12 months or 95 days during the preceding 6 months, he shall be deemed to have rendered continuous service for a period of one year or six months respectively.
iii) In case of any other non-seasonal establishment, he has actually worked for at least 240 days during the preceding 12 months or 120 days during the preceding 6 months, he shall be deemed to have rendered continuous service for a period of one year or six months, respectively. iv) In case of a seasonal establishment, he has actually worked for at least 75% of the days of which the establishment was in operation.

Notes : For this purpose an employee shall be deemed to actually worked on a day on which -
a) he has been laid off under an agreement or in accordance with standing orders
b) he has been on leave with full wages, earned in the previous years
c) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment and
d) in the case of female, she has been on maternity leave not exceeding 12 weeks.

Administrative Authority
Provisions enforced by both Central and State Government. Sec. 2(a)

Central / State Government shall appoint the Controlling Authorities for different areas and inspectors. The Central / State Government shall also frame rules for administration of the act.

What is Gratuity ?
Calculation of Gratuity

In case of non-seasonal establishment
= 15 days wages X number of completed years of service
In case of seasonal establishment
= 7 days wages X number of seasons which employed

Maximum Gratuity
Rs. 3,50,000/- Sec 4(3) Limit enhanced from Rs. 1,00,000 vide Payment of Gratuity (Amdt.) Act, 1998 w.e.f. 24.09.1997. Earlier the limit had been raised from Rs. 50,000 to 1,00,000 vide payment of gratuity (Amendment Act) 1994 w.e.f. 24.05.1994

Meaning of Wages Sec 4(2)
Wages shall be
In case of piece-rated employees
15 days = Wages of 3 months (excluding O.T.) immediately preceding termination X 15 Number of working days in such period of 3 months

In case of monthly rated employees
15 days = monthly wages last drawn X 15 divided by 26

Wages means all emoluments earned while on duties or on leave, as per condition of employment includes D.A. but excludes bonus, commissions, HRA, OT and any other allowance. Sec 2(s)

In case of re-employment of disabled employee at reduced wages, pre-disablement wages to be taken into account for calculating gratuity in respect that period and reduced wages for the balance period. Sec 4(4).

Deductions permissible from Gratuity
Gratuity payable on termination for any willful omission, negligence, damage, loss or destruction of employer's property, gratuity can be reduced to the extent of such damage or loss. Sec 4(6)(a)

Forfeiture of Gratuity
Whole or part forfeiture if termination of employee due to employee's riotous or disorderly conduct or any other act of violence of any offence including moral turpitude committed in the course of his employment. Sec 4 (6)(b)
A statutory provision of forfeiture must be construed strictly. In the absence of such termination the employee does not forfeit his right to gratuity.

Nomination Sec 6
Every employee to submit nomination in prescribed form in duplicate, either personally or through Registered AD within 30 days of completion of 1 year of service.
Only family members viz. Spouse, children (married or unmarried), dependent parents, dependent parents of spouse and the widow and children of pre-deceased son. If no family, any of the person can be nominated and subsequently fresh nomination to be made. More than one nominee possible.
Employer to verify particulars of application and return attested copy to the employee within 3 days of receipt. Original to be kept in safe custody.
Nominee can be changed at any time.
If the nominee pre-deceases the employee interest to revert back to the employee

Intimation of Gratuity becoming payable
As soon as gratuity becomes payable, employer to determine the amount of gratuity and give a notice in the prescribed form to the payee, viz. the employee, nominee, legal heir and to the controlling authority of that area. Sec 7(2)

Application for payment of Gratuity
Employee to make an application in prescribed form, within 30 days from the date of gratuity becoming payable, either personally through Registered A.D.
Where date of superannuation or retirement is known employee may apply even 30 days before such date.
Legal heir may apply within 1 year from the date gratuity becomes payable. Succession Certificate not necessary.
Any delayed application for payment of gratuity should also be entertained by the employer, if there is sufficient cause for the delay.

Notice in response to Employee's Application
In response to employee's application employer to issue a notice of receipt in 15 days. In case the claim is accepted a notice should specify the amount of gratuity payable and date of payment which should be within 30 days of receipt of application. Sec 7(2) and (3)
In case the claim is rejected notice should specify the reasons of rejection.
A copy of notice should be sent to the controlling authority of the area.
If the claimant is a nominee or legal heir the employee may ask for such witness or relevant evidence for establishing his identity and entitlement.
Note : To be served personally or sent through Registered AD.

Mode of payment
Generally payable by cash, cheque or Demand Draft. If the amount of gratuity is less than Rs. 1000/- it may be paid by postal money order at the desire of the payee.
Details of payment should be intimated by the employer to the Controlling Authority Assistant Labour Commissioner (Central of the area)

Time limit for payment
Gratuity to be paid by employer within 30 days from the date it becomes payable or after such date alongwith simple interest @ 10% p.a.(or as notified by Government by time to time) on the amount of gratuity, unless the delay is on the part of the payee. Sec 7 (3A) w.e.f. 01.10.1987

Gratuity to be deposited with the Controlling Authority in certain cases
Admitted amount of Gratuity payable by the employer to be deposited with the Controlling Authority, of that area, if ;
i. Nominee or the legal heir of the employee is a minor. Sec 4(1)
ii. Dispute as to amount or admissibility of the claim of gratuity or as to the person entitled. Sec. 7(4)

In case of (i) above the Controlling Authority shall deposit such sum in term deposit with SBI or any of it's subsidiaries or any nationalised bank.

Employers to obtain Compulsory Insurance / Establish Approved Gratuity Funds. Sec 4A w.e.f. 01.02.1991
Employer to obtain an insurance from LIC for his liability to pay Gratuity or should establish an approved Gratuity Fund [U/S 2(5) of Income Tax Act] or who are having atleast 500 employees should establish an Approved Gratuity Fund.
Employer to register establishment with the Controlling Authority (Assistant Labour Commissioner)
Payment of premium, contribution is compulsory. In case of failure, employer liable to pay Gratuity payable alongwith interest to Controlling Authority.

Protection of Gratuity against attachment
Gratuity payable under the act cannot be attached in execution of any decree / order of civil revenue or criminal court sec 13. However, if it is payable to the heirs of the employee, it may be attached
Ramvati v/s Krishan Gopal and Ors. (1988) 1 CLR 253; (1988) Lab 1.c 1298 (Del).

Obligations of Employers
1. Employer to submit a notice of opening an establishment to the Controlling Authority of the area in the prescribed form containing name, address of establishment, employer, nature of business, any change to be intimated or intention to close down business.
2. Employer to correctly ascertain amount of gratuity payable and pay the same.
3. To obtain insurance or establish approved gratuity fund.
4. Display notice at or near main entrance in bold letters in English and in the Local language.

Notice to contain
a) Name of the officer, designation, authorised to receive notice of payment of gratuity under the Act or rules.
b) Abstract of the Act & rules in prescribed form (Form U).

Rights of Employers

1. To make authorised deductions
   
2. To forfeit wholly or partly amount of gratuity
   
3. To refer any dispute as to admissibility of claim or as to person entitled to the Controlling Authority of the area Sec 7(4)(b).
   
4. To appeal against an order of the Controlling Authority to the appellate authority (or the State Government) within 60 days of the receipt of the order Sec. 7(7).
   

Rights of Employees

1. Appoint family member or any other person as his nominee
   
2. Claim the amount of gratuity
   
3. Apply to the Controlling Authority for recovery of gratuity payable which remains unpaid Sec 8.
   
4. Refer any dispute as to admissibility of claim or as to person entitled to the Controlling Authority of the area.
   
5. Appeal against an order of the Controlling Authority to the appellate authority within 60 days of the receipt of the order.
   
   

Sample Problem
Mr. X joined an establishment in Jan. 1981 at Rs. 2600 p.m. His wages were raised to Rs. 3,250 p.m. in July 1985, further Rs. 3640 p.m. in Jan. 1991 and further to Rs. 6000 p.m. in January 1996. In April 1998, Mr. X retired on superannuation when his last drawn wages were Rs. 6000 p.m. The amount of gratuity payable to Mr. X shall be calculated as under :
Mr. X retired on 98.4.1
Joined on 81.1.1
Total service 17.3.0 i.e.17 complete years.

His last drawn salary was Rs. 6000/- p.m. Since in April 1998, there is no salary ceiling for eligibility for gratuity the last drawn salary for computation would be Rs. 6000/- p.m.
Therefore gratuity for the period of 17 complete years
= 15 day's wages X 17
= Monthly wages last drawn X 15 X 17 divided by 26
= Rs. 6000 X 15 X 17 divided by 26 = Rs. 58,846.