What is Gratuity Act 1972 – Payment Rules and Calculation?

Gratuity Act 1972

Before the implementation of gratuity payment, there was really no incentive for the employee to provide efficient work to expand and develop the company’s products. The Payment of Gratuity Act of 1972 provided a silver lining for employees so that they could earn more and optimize their personal efforts in making a difference in their life beyond office borders. So, the 1972 Gratuity Act was enacted to reward employees with a gratuity amount. This is a cash prize for their contributions to companies., oilfields, shops, factories, and so on. 

Guidelines of the Gratuity Act 1972

Employers give gratuity sums to their workers as a gesture of recognition for their services to the firm under the 1972 Payment of Gratuity Act. It’s a monetary compensation offered to retired personnel of mines, industries, oilfields, plantations, ports, and so on.

This Gratuity Act also includes a provision for children. The supreme authority must send the gratuity cash to the appropriate bank account set for the convenience of the minor in question until they reach the age of majority and have access to the record and balance. Moreover, this Act also provides for the employment of up to 6 months. Here, the gratuity sum will be calculated by dividing 15 days of earnings by the rate of salary collected on the final day concerned. However, any overtime pay-out should not be included in the organisation’s gratuity sum. Also, the gratuity amount cannot exceed the limit of ten lakh rupees.

Understanding the Gratuity Guidelines:

A worker has the authority to collect a gratuity sum under the Act. Nevertheless, under two situations, the entitlement to collect gratuity might be cut short:

• The company fires an employee for willful omission or damage, loss, or any destruction of the company-owned property or possessions.
• If you need to fire a worker because of misbehaviour or unethical behaviour in the workplace.

Further explanation:

The gratuity act further provides that whenever a worker or staff member becomes entitled to a gratuity sum from the company, the employee must apply within one month of the appropriate date. Moreover, if you know the resignation date or date of death, you can make the gratuity application at least a month in advance. A company cannot reject a worker’s application beyond a month, but if a delay occurs, you need to provide sufficient reasons for the same.

The gratuity payout explains that an application cannot be denied for illegitimate grounds, such as applying just after the expiration date. The company must inform the worker of the money paid as well as the payment date within a limit of 15 days after receiving the gratuity application. Once everything is finished, the payment must be made within 30 days of the application being received. Also, if the request is denied, the company must offer a reasonable explanation to the worker.

Additional guidelines:

Now, let’s say that a worker’s nominee demands the gratuity sum. Thus, in that instance, the company or the boss may request a credible witness or evidence to back the employee’s successor. So this ensures that the set terms and conditions are genuine. Thus, in such a circumstance, the company must accept the gratuity claim. Also, you can pay gratuities by check, cash, or demand draft.

In the following circumstances, a worker or the nominee may register a complaint with a higher authority:

• If the company refuses to approve the employee’s request for gratuity cash;
• If the sum of gratuity received is lower than the exact value; 
• If, after approving the gratuity payment application, the stated sum of gratuity is absent or fails payment on time.

Timelines:

Any objection made by either the company or the worker must be submitted to the respected Assistant Labor Commissioner, and that too within a time period of 90 days of the occurrence. Thus, if the reasons offered are legitimate and too important to ignore, the commissioner may approve the critique even after the time period of 90 days.

So, if case report is filed, the individual must be available at the date and location specified by the commissioner. Also, the petition may be dismissed if the individual fails to appear for the trial. However, if the grounds for the absence appear real, the matter might be reviewed within a period of 30 days for re-hearing. Nevertheless, if the company fails to appear on the re-hearing time and date, the commissioner will preside over the case in the worker’s favour.

Gratuity Eligibility in India

If a worker has delivered 5 years’ worth of continuous service to any organisation, the management may sanction the worker for the company’s gratuity payment. However, 5 years of service is not a required requirement for mortality or other disability. A retiring worker, for instance, is also eligible for any gratuity cash along with his pension amount.

The only exception is whenever an employee dies or becomes incapacitated as a result of an unfortunate accident or serious sickness. The company is then required to provide the gratuity sum to the individual’s chosen beneficiary, regardless of the duration of years of his or her service completed.

The Formula for Calculating Gratuity Payments

The 1972 gratuity act’s payout provisions include precise calculations for determining gratuity equity. All of that depends on the last payment received. It consists of 15 days’ value of compensation for a full year with the current company. Thus, the final number of the previous basic wage is deducted and transferred to the amount of allowance. However, it doesn’t include the amount of the House Rent Allowance. Take the following formula for calculating gratuity:

Gratuity = t x s x 15 /26. 

Here, 

‘t’ means the number of years of service in the company; and

‘s’ means the last base compensation and allowance sum.

Thus, as stated by the Central Government, this maximum gratuity sum award for an employee who retires or after his or her death/disability is INR20 lakh. Also, in accordance with the 2021 Pension Rules, the amount of retirement gratuity matches one-quarter of the compensation for each full six-month term of employment. Also, the amount of gratuity is equal to 16.5 times the emoluments.

Gratuity payout:

The family of a deceased employee receives a death gratuity during their first period of service. The following is the amount of payout for death or suicide gratuity:

• In case of period of service is less than one year, the gratuity amount is two times the payment amount.
• In case, service is one year or more but less than five years, the gratuity amount will be six times.
• In case, service is between five years and eleven years, the gratuity amount will be twelve times the payment amount.
• In case, service is between eleven years and twenty years, the gratuity amount will be twenty times the payment amount.
• In case, service is more than twenty years, the gratuity amount will be thirty-three times the payment amount.

Gratuity Form Types

So, here is a list of all the gratuity forms and their uses:

The Bottom Line

The Payment of Gratuity Act was enacted in order to protect the rights of workers and to create a sense of appreciation towards hardworking employees. So, it is an effective tool for employers who wish to reward their esteemed employees. It also gave power to employees and provided them with the means to take care of their future. So, employees can now enjoy a significant boost in income that will do wonders for their post-retirement life. Thus, by allowing female personnel to take maternity breaks, the Central Government of India has attempted to enhance social welfare.

However, the extent of the gratuity payment statute is for large companies and does not apply to businesses with fewer than ten personnel. So, it is quite customary nowadays that many employers fail to take this into consideration. The biggest adjustment needed is in revising the Act’s application. It’s not being obeyed or controlled enough by workers and companies.

About The Author

Rohit

MBA Insurance and Risk

Rohit is an experienced insurance professional with 7 years in the industry, specializing in Group Gratuity. Writing for SecureNow, he creates insightful blogs and articles that help businesses understand the benefits and intricacies of group gratuity plans. His expertise ensures readers receive practical advice on implementing and managing these plans to support employee financial well-being. Committed to making complex insurance topics accessible, Rohit stays current with industry trends, providing valuable content that empowers businesses to make informed decisions about their group gratuity needs.