Gratuity is an old age retiral social security benefit. It is a lump sum payment made by an
employer to an employee in consideration of his past service when the employment is
terminated. In the case of employment coming to an end due to retirement or
superannuation, it enables the affected employee to meet the new situation which quite
often means a reduction in earnings or even total stoppage of earnings. In the case of death
of an employee, it provides much needed financial assistance to the surviving members of
the family. Gratuity schemes, therefore, serve as instruments of social security and their
significance in a developing country like India where the general income level is low
cannot be over emphasised. Gratuity shall be payable to an employee on the termination of
his employment after he has rendered continuous service for not less than five years:- (i)
on his superannuation; or (ii) on his retirement or resignation; or (i) on his death or
disablement due to accident or disease.
According to the Section 2A for the purpose of this Act, the continuous service means an
uninterrupted service during the employment period. This includes the leave due to
sickness, accident, lay off, strike, etc. If the interruption is of six months or one year, then
the employee is not entitled to gratuity benefits. He/She should have worked for at least
190 days in mine or coalfield like establishment(where duration of work is only for 6
months) and 240 days in other areas.
Recently, a question arose before the Supreme Court of India that whether the services
provided by the employees were regularised or not and whether they are entitled to gratuity
amount or not in the case of Netram Sahu v. State of Chhattisgarh. The appellant
employee had in all rendered 25 years and 3 months of service (22 years and 1 month as
daily wager and 3 years and 2 months as regular work charge employees). However, the
Appellant was not paid the gratuity amount by the State after his retirement because out of
the total period of 25 years of his service, he worked 22 years as daily wager and only 3
years as a regular employee, the Supreme Court of India held that the state should release
the gratuity amount of the employee because the Appellant had actually rendered the
service for a period of 25 years. Because the services were regularised, the appellant was
entitled to claim its benefit for a period of 25 years regardless of the post and the capacity
on which he worked for 22 years. This shows that whether the services were regularized or
not, is of no significance to the continuous service to the said Act.
Family, in relation to an employee, shall be deemed to consist of:
(i) in case of a male employee, himself, his wife, his children, whether married or
unmarried, his dependent parents and the dependent parents of his wife and the widow and
children of his predeceased son, if any,
(ii) in the case of a female employee, herself, her husband, her children, whether married
or unmarried, her dependent parents and the dependent parents of her husband and the
widow and children of her predeceased son, if any. [Section 2(h))
Explanation: Where the personal law of an employee permits the adoption by him of a
child, any child lawfully adopted by him shall be included in his family.
When the Gratuity payable?
Gratuity shall be payable to an employee on
the termination of his employment after he has rendered continuous service for
not less than five years,-
(a) on his superannuation, or
(b) on his retirement or resignation,
(c) on his death or disablement due to accident or disease:
Noted that the completion of continuous service of five years shall not be necessary where
the termination of the employment of any employee is due to death or disablement.
To whom the Gratuity payable?
It is payable normally to the employee himself. However, in the case of death of the
employee, it shall be paid to his nominee and if no nomination has been made, to his heirs
and where any such nominees or heirs is a minor, the share of such minor, shall be
deposited with the controlling authority who shall invest the same for the benefit of such
minor in such bank or other financial institution, as may be prescribed, until such minor
Amount of Gratuity payable?
The person entitled to receive the gratuity amount shall send an application in writing to
the employer. The employer shall calculate the gratuity amount and provide notice in
writing to the concerned employee and the controlling authority. The payment should be
made within 30 days from the date payable to the employee. Failure of payment within the
prescribed limit will result in payment of simple interests. However, if the delayed
payment is because of the employee then the employer is not entitled to pay the simple
In a prominent case law of Y.K. Singla v. Punjab National Bank, the highest court of India,
the Supreme Court had to decide whether an employee whose gratuity has been withheld
under Regulation 46 of the Punjab National Bank (Employees) Pension Regulations is
entitled to get interests because of the delay after the completion of the proceeding? The
court held that even though the provisions of the 1995 Regulations, are silent on the issue of
payment of interest, the appellant would be entitled to interest, on account of delayed
payment under the Payment of Gratuity Act for the benefit of the employee.
The disputes arising between the employee and employer shall be referred to the controlling
authority and proceeding for the resolution presided by the controlling authority shall be
considered to be judicial proceeding. The controlling authority has the authority to enforce
the presence of any person and examine his oath, production of relevant documents and
issuing commissions for the examination of witnesses if required. After due inquiry and
giving the parties a reasonable opportunity of being heard, the controlling authority may
determine the matters and pass appropriate orders. The aggrieved party can apply for appeals
to the government.
An employee covered by the Act is required to make nomination in accordance with the
Rules under the Act for the purpose of payment of gratuity in the event of his death. The
rules also provide for change in nomination.
Recovery of Gratuity
If the employer delays in the payment of gratuity amount under the prescribed time limit,
then the controlling authority shall issue the certificate to the collector on behalf of the
aggrieved party and recover the amount including the compound interest decided by the
central government and pay the same to the person. However, these provisions are under two
The controlling authority should give the employer a reasonable opportunity to show the
cause of such an Act.
The amount of interest to be paid should not exceed the amount of gratuity under this Act.
The appropriate Government may exempt any factory or establishment covered by the Act
or any employee or class of employees if the gratuity or pensionary benefits for the
employees are not less favourable than conferred under the Act.
The Controlling Authority and the Appellate Authority
The controlling authority and the Appellate Authority are two important functionaries in the
operation of the Act. Section 3 of the Act says that the appropriate Government may by
notification appoint any officer to be a Controlling Authority who shall be responsible for
the administration of the Act. Different controlling authorities may be appointed for different
areas. Section 7(7) provides for an appeal being preferred against an order of the Controlling
Authority to the appropriate Government or such other authority as may be specified by the
appropriate Government in this behalf.
Violation of the provisions of the Act shall entail certain penalties. They are:
- For avoiding any payment, if someone makes a false representation or false
statement shall be punishable with imprisonment for 6 months or fine up to Rs.
10,000 or both.
- Failure to comply with the provisions of this Act shall be punishable for a
minimum of 3 months which may extend upto 1 year or a fine of Rs. 10,000 which
may extend upto 20,000.
- Non-payment of gratuity under the Act will lead to offence and the employer shall
be punishable with imprisonment for at least 6 months and which may extend
upto 2 years unless the court provides for the sufficient reason for less payment.
The Payment of Gratuity Act, 1927, is a welfare statute provided for the welfare of the
employees who are the backbone of any organisation, company or startups. The gratuity
amount encourages the employee to work efficiently and improve productivity. Recently, by
the Payment of Gratuity (Amendment) Act, 2018, the central government has tried to
promote social welfare by providing leverage to the female employees who are on maternity
leave from ‘twelve weeks’ to ‘twenty six weeks’.
However, the scope of this Act is limited to large scale companies or organisations and is
not applicable to organisations where the number of employees is less than 10. Yet, the Act
in its entirety is complete and therefore it overrides other Acts and statues in relation to
gratuity. The only need of the hour is to change or modify the implementation of the Act as
this Act is still not followed by many companies or corporations.
1- Industrial labour and General Laws, ICSI