The Payment of Gratuity Act, 1972, is a significant piece of social security legislation in India that aims to reward employees for long-term service with a lump sum payment upon retirement, resignation, death, or disability. For employers, understanding and complying with the Act is crucial — not only to meet legal obligations but also to maintain goodwill, build trust, and support employee retention.
Gratuity is not a favor but a statutory right of employees, and non-compliance can lead to penalties, interest on delayed payments, and loss of credibility. As the Indian workforce becomes increasingly aware of its rights, businesses must ensure that gratuity is factored into payroll, policy, and financial planning.
Who Is Eligible for Gratuity?
Under the Act, gratuity is payable to employees who:
Have completed at least 5 years of continuous service
Work in an establishment with 10 or more employees
Leave due to retirement, resignation, superannuation, death, or disability (the 5-year rule is waived in case of death or disability)
Key Provisions Every Employer Should Know
1. Calculation Formula:
Gratuity = (15/26) × Last drawn salary × Number of years of service
“Salary” includes basic + dearness allowance
Service over 6 months is rounded up to the next full year
2. Maximum Gratuity Payable:
As of the latest amendment, the maximum ceiling is ₹20 lakhs, although employers can offer higher amounts voluntarily.
3. Tax Exemption:
Gratuity received up to ₹20 lakhs is tax-exempt under Section 10(10) of the Income Tax Act for employees covered by the Act.
4. Payment Timeline:
Gratuity must be paid within 30 days from the date it becomes payable. Delays attract simple interest as notified by the government.
5. Forfeiture of Gratuity:
Gratuity can be partially or fully forfeited if the employee is terminated due to:
Willful misconduct
Riotous or violent behavior
Offences involving moral turpitude committed during employment
Employer Obligations
Register under the Act if employing 10 or more persons
Track service records accurately to determine eligibility
Budget for future gratuity liability in your financial planning
Inform employees about their gratuity entitlements
Maintain transparent payroll records and employee exit procedures
Many businesses choose to fund gratuity liabilities through group gratuity insurance schemes, which help them spread out costs and meet obligations smoothly.
Implications of Non-Compliance
Failure to pay gratuity on time can result in:
Interest on delayed payments
A fine up to ₹10,000 or imprisonment for default
Legal action by the employee or labour inspector