Gratuity Claims, Disputes & Employer Compliance

GRATUITY — STATUTORY FRAMEWORK

1. APPLICABILITY: Payment of Gratuity Act, 1972 applies to every factory, mine, oilfield, plantation, port, railway company, shop or establishment employing 10 or more employees. Once covered, applies even if employee count falls below 10 (Section 1(3)(b)).

2. ELIGIBILITY (Section 4): Continuous service of not less than 5 years on termination (waived for death or disablement). Supreme Court in Mettur Beardsell Ltd. v. Regional Labour Commissioner (1998): 4 years and 240 working days treated as 5 years of continuous service (6-day establishments); for 5-day establishments: 190 working days in the fifth year.

3. CALCULATION (Section 4(2)): For Act-covered employees: (Last drawn wages × 15/26) × completed years of service. For non-Act employees: (Last drawn wages × 15/30) × years. Part of a year exceeding 6 months counts as a full year. 'Wages' under Section 2(s): basic pay + DA + commission as % of turnover. HRA, overtime, and bonus excluded.

4. MAXIMUM LIMIT: ₹20,00,000 (Payment of Gratuity Amendment Act, 2018, effective 29 March 2018). Previous ceiling: ₹10,00,000. Central Government may notify higher ceiling under Section 4(3).

5. TAX EXEMPTION (Section 10(10), Income Tax Act, 1961): Exempt to the least of: (a) ₹20,00,000; (b) actual gratuity received; (c) 15/26 × last drawn salary × completed years — for Act-covered employees. Government employees: entire amount exempt. Non-Act employees: ceiling ₹10,00,000 under Section 10(10)(iii).

6. EMPLOYER INSURANCE OBLIGATION (Section 4A): Every covered employer must obtain LIC/approved insurer policy or establish an approved gratuity fund. Failure: offence under Section 9.

7. PAYMENT TIMELINE (Section 7): Payable within 30 days of due date. Delay attracts simple interest at 10% p.a. Employee applies in Form I; if disputed/unpaid, application to Controlling Authority in Form J. Employer dispute: Form N.

8. FORFEITURE (Section 4(6)): Permitted only for (a) wilful omission/negligence causing loss/damage to property, or (b) termination for moral turpitude offence in course of employment. Forfeiture requires proper disciplinary proceedings.

We advise employers and employees on gratuity entitlement under the Payment of Gratuity Act, 1972 — from correct computation and timely payment to representation before the Controlling Authority in disputes, and tax optimisation under Section 10(10) of the Income Tax Act, 1961.