Payment of Gratuity Act 1972 — Eligibility, Calculation and Employer Compliance

Gratuity is a statutory benefit payable by employers to employees who have completed at least five years of continuous service. The Payment of Gratuity Act 1972 governs gratuity in India, covering factories, mines, oilfields, plantations, ports, railway companies, shops and establishments with ten or more employees. Here is the complete guide for employers and employees.

Who is Eligible for Gratuity?

• Employee must have completed at least 5 years of continuous service with the same employer
• Applies on superannuation (retirement), resignation, termination (except on grounds of misconduct), death or disablement
• Exception — if an employee dies or is permanently disabled, gratuity is payable even without completing 5 years
• Continuous service includes authorised leaves, layoffs, and strikes not involving misconduct

Gratuity Calculation Formula

Gratuity = (Last Drawn Basic Salary + DA) × 15/26 × Number of Years of Service

• 15 represents 15 working days
• 26 represents 26 working days per month (excluding Sundays)
• Fractions of a year are counted as a full year if the employee has worked more than 6 months in that year

Example: Basic + DA = ₹30,000/month; 12 years of service → Gratuity = ₹30,000 × 15/26 × 12 = ₹2,07,692

Maximum Gratuity Amount

The ceiling on gratuity under the Payment of Gratuity Act is currently ₹20 lakh. Employers can voluntarily pay more, but the statutory obligation is capped at ₹20 lakh. Amounts above ₹20 lakh are considered ex-gratia.

Tax Treatment of Gratuity

• Gratuity received by government employees — fully exempt from income tax
• Gratuity received by private sector employees covered by the Act — exempt up to the least of: ₹20 lakh, actual gratuity received, or the formula amount (15/26 × basic × years)
• Gratuity received by employees not covered by the Act — exempt up to ₹20 lakh (1/2 month's average salary per year of service formula)

Employer Obligations

• Gratuity must be paid within 30 days of it becoming due
• Employer must obtain gratuity insurance (from LIC or approved insurer) or establish an approved gratuity trust
• Nomination by employees must be obtained in Form F at joining and updated on change in family status
• Non-payment or delayed payment attracts interest at the rate prescribed by the government

Conclusion

Gratuity is a mandatory statutory benefit — non-payment can lead to criminal prosecution of employers. SPOTON handles payroll compliance including gratuity computation, fund structuring and labour law compliance for businesses across Kerala. Contact us for expert employment law advisory services.