The Payment of Gratuity Act, 1972 — Explained Section by Section

The Gratuity Act was introduced to provide a uniform statutory framework for what had until then been a fragmented, voluntary, and often litigated benefit. The Statement of Objects and Reasons described gratuity as a 'retiring benefit' meant to provide an old-age cushion for employees and their families.

The Act applies to the whole of India and is administered jointly by the central and state governments depending on the nature of the establishment. The central government handles railways, ports, oilfields, mines, and major ports; state governments handle most other establishments including factories, shops, plantations, and motor transport.

Section 1 extends the Act to every factory, mine, oilfield, plantation, port, railway company, motor transport undertaking, shop, or other establishment in which 10 or more persons are employed or were employed on any day of the preceding 12 months. The 'once covered, always covered' principle ensures protection continues even if the workforce later shrinks.

Section 2 defines key terms: 'employee', 'employer', 'wages', 'continuous service', and 'family'. The 2009 amendment removed the wage ceiling that previously excluded high earners from the definition of 'employee', so today all employees regardless of designation or salary are covered.

Section 2A is the technical heart of eligibility. It defines continuous service as uninterrupted service that may include service interrupted by sickness, accident, leave, lay-off, strike (not being an illegal strike), lockout, or cessation of work not due to the fault of the employee.

Where service has been broken, an employee is still deemed to be in continuous service if they have worked 240 days in a 12-month period under a six-day-week employer (190 days under a five-day-week or mine).

Section 4 is the operative payment rule. Gratuity is payable to an employee on termination of employment after they have rendered 'continuous service for not less than five years' — on superannuation, retirement, resignation, death, or disablement. The 5-year requirement is waived in case of death or disablement.

The rate is 15 days' wages for every completed year of service, with last drawn wages used as the multiplier. Section 4(3) caps the maximum amount payable; this ceiling has been raised over the decades — from ₹3.5 lakh to ₹10 lakh in 2010, then to ₹20 lakh in March 2018.

Section 4(6) is the forfeiture clause: gratuity may be wholly or partly forfeited if the employee's services are terminated for proven wilful omission, riotous behaviour, violence, or an act of moral turpitude — but only after due procedural compliance.

Inserted in 1987, Section 4A makes it compulsory for employers (with some exceptions for those who already manage approved gratuity funds) to take insurance for their gratuity liability from LIC or another approved insurer. The provision ensures that employees do not lose gratuity if the employer goes bankrupt — the insurance pool stands behind the obligation.

Most large private employers in India fund their gratuity through approved gratuity trusts (under Part B of the Fourth Schedule to the Income Tax Act) managed by LIC, HDFC Life, ICICI Pru, or other insurers.

Section 6 requires every employee who has completed one year of service to make a nomination in Form F naming one or more members of the 'family' as defined in Section 2(h). The nomination must be made within 30 days of completing one year and updated whenever the family composition changes (e.g., on marriage).

Nominations in favour of non-family members are void if the employee has a family at the time. This is a critical safeguard for spouses and children, and the section often forms the basis of family-vs-relative disputes after death.

Section 7 lays down the procedure once gratuity becomes payable. The employee (or nominee) files Form I; the employer must determine the amount within 15 days and pay within 30 days. Late payments attract simple interest at the notified rate.

If the amount is in dispute, the employer must deposit the admitted portion with the Controlling Authority and contest only the disputed portion. The Controlling Authority — usually the Assistant Labour Commissioner — adjudicates disputes with powers similar to those of a civil court.

Section 9 prescribes criminal penalties for non-compliance. Knowingly making a false statement to avoid payment, or failing to comply with the Act, is punishable with imprisonment up to 6 months or a fine up to ₹20,000 or both. For repeat or serious offences, especially evasion of payment, imprisonment can extend to 2 years.

The most significant recent amendment was the Payment of Gratuity (Amendment) Act, 2018, which raised the tax-free ceiling for private sector employees from ₹10 lakh to ₹20 lakh and gave the central government power to notify maternity leave duration treated as continuous service.

The Code on Social Security, 2020 — once notified in full — will subsume the Gratuity Act into a consolidated social security framework, alongside EPF, ESI, maternity, and unorganised worker benefits. Pending full notification, the 1972 Act remains the operative law in 2026.