Payment of Gratuity Act, 1972: formula sheet

Key formulas

Meaning of gratuity

Gratuity = lump-sum payment by employer to employee for service rendered, on leaving employment

It is a statutory benefit for covered employees, not a bonus or wage.

Repeal rule

Section 164, Code on Social Security, 2020 = repeal of listed enactments + savings, from the date the relevant provisions are notified into force

The Payment of Gratuity Act, 1972 is among the enactments listed for repeal. The repeal takes effect only on notification.

Savings rule

Things done and actions taken under the old laws are saved so far as not inconsistent with the Code

Say 'so far as not inconsistent with the Code'. Do not say they continue unconditionally.

Structure

Old: separate Act (1972) → New: gratuity chapter within one Code (2020)

The Code merges nine social security laws.

Eligibility period

Continuous service ≥ 5 years (3 years for a working journalist)

Section 53(1) and first proviso. The five years is for eligibility, not for the amount.

Exceptions to the five-year rule

No five-year need on death, disablement, expiry of fixed term employment, or a notified event

Second proviso to Section 53(1). Death needs no minimum service.

Fifteen days' wages (monthly rated)

Monthly wages last drawn ÷ 26 × 15

Explanation 3 to Section 53.

Gratuity per year

Gratuity = (Monthly wages ÷ 26) × 15 × completed years of service

A part of a year above six months counts as a full year. Section 53(2). Rate may be changed by notification.

Fixed term or deceased employee

Gratuity is paid on a pro rata basis

Third proviso to Section 53(2).

Seasonal establishment

Seven days' wages for each season

Second proviso to Section 53(2).

Piece-rated employee

Daily wages = average of total wages for the 3 months before termination, excluding overtime

First proviso to Section 53(2).

General eligibility rule

Continuous service ≥ 5 years + termination on a listed ground (Section 53(1))

Listed grounds: superannuation; retirement or resignation; death or disablement; end of fixed term contract; notified event.

Exceptions to five years

No 5-year need if exit is due to death, disablement, expiry of fixed term employment or a notified event

Second proviso to Section 53(1).

Working journalist

5 years is deemed 3 years

First proviso to Section 53(1). Applies to working journalists as defined in the 1955 Act.

Fixed term and deceased employee

Gratuity paid on pro rata basis

Third proviso to Section 53(2).

Excluded persons

Government post holders governed by another Act or rules on gratuity are not employees

Explanation 1 to Section 53.

Death of employee

Gratuity goes to nominee, or to heirs if no nomination

Third proviso to Section 53(1). A minor's share is deposited with the notified competent authority until majority.

Gratuity for monthly rated employee

Gratuity = (Last drawn monthly wages ÷ 26) × 15 × Number of years of service

Explanation 3 to Section 53. Years means completed years, plus one more if the part year exceeds six months. 15 days is the rate unless the Central Government notifies a different number of days; use the number the question gives.

Rounding of service period

Part of a year in excess of six months = counted as one full year

Exactly six months or less is ignored. Example: 8 years 6 months = 8 years; 8 years 7 months = 9 years.

Piece-rated employee: daily wage

Daily wages = Average of the total wages received in the 3 months immediately preceding termination of employment (overtime wages excluded)

Section 53(2) first proviso. Wages paid for overtime work are not taken into account. The proviso gives no other divisor, so use the daily wage figure the question works out or gives.

Seasonal establishment

Gratuity = 7 days' wages for each season

Section 53(2) second proviso. Applies to an employee of a seasonal establishment who is not employed throughout the year. Eligibility depends on Section 54(C): actual work on at least 75% of the days the establishment was in operation. Use the daily wage as given in the question.

Fixed term or deceased employee

Gratuity is paid on a pro rata basis

Section 53(2) third proviso. Five years' service is not required for death or expiry of fixed term.

Ceiling

Gratuity payable ≤ amount notified by the Central Government

Section 53(3). Apply the limit given in the question. Compare your computed figure to it and pay the lower.

Employer's duty to determine

As soon as gratuity becomes payable: determine amount + written notice to the person entitled and the competent authority

Applies whether or not the employee has applied. Section 56(2).

Time limit for payment

Pay within 30 days from the date gratuity becomes payable

Section 56(3). The clock starts when it becomes payable, not when the employee applies.

Interest on delay

Simple interest from the date payable to the date of payment, at a rate not exceeding the notified long term deposit rate

Section 56(4). Simple, not compound. No interest only if delay is the employee's fault AND the employer has the competent authority's written permission.

Disputed gratuity

Employer deposits the admitted amount with the competent authority

Section 56(5)(a). The competent authority then decides the dispute after hearing the parties.

Appeal period

Appeal within 60 days of receipt of order; extendable by a further 60 days for sufficient cause

Section 56(8). An employer's appeal is admitted only with a certificate of deposit or deposit with the appellate authority of the amount required under sub-section (5).

Forfeiture for conduct

Termination for riotous or disorderly conduct, a violent act, or an offence involving moral turpitude in the course of employment → gratuity forfeited wholly or partly

Ground must be linked to the employment and to the termination.

Forfeiture for damage

Amount forfeited ≤ loss caused to the employer's property

Remaining gratuity must be paid. Forfeiture is not a penalty beyond the loss.

Amount payable after damage forfeiture

Payable = Gratuity due − Forfeited amount (limited to the damage)

If damage exceeds gratuity, the whole gratuity may be set off, not more.

Gratuity funding rules

Rules on insurance, exemption conditions and approved gratuity fund: Section 155(2)(za), Code on Social Security, 2020

This is the Central Government's rule-making power.

Social Security Fund

Section 141: Central fund for unorganised, gig and platform workers; separate accounts for each source

Not the employer's gratuity fund.

Quick revision

• Gratuity is a lump sum paid by the employer when service ends, as a reward for long service.
• General eligibility needs a minimum period of continuous service; check the current period in your study material, and note the shorter period for fixed-term employees.
• The service condition does not apply where the employee's service ends by death or disablement.
• Continuous service means uninterrupted service, and it includes certain breaks such as authorised leave, sickness or accident as the law specifies.
• Standard formula for a monthly-rated employee: last drawn wages ÷ 26 × 15 × completed years of service.
• A part of a year exceeding six months is counted as a full year.
• Example: wages ₹26,000, service 10 years: 26,000 ÷ 26 × 15 × 10 = ₹1,50,000.
• Always compare the computed amount with the maximum limit and pay the lower of the two.
• Nomination is made by the employee so that the gratuity can be paid to the nominee on death.
• Forfeiture is allowed only on the grounds set out in the law, such as damage to employer's property or terminable misconduct, and only to the extent the law allows.
• Under section 155 the Central Government makes rules by notification, after previous publication, on many details of the Code.
• Under section 57, employers other than Central or State Government establishments must arrange insurance, or an exemption through an approved gratuity fund on prescribed conditions.

Common mistakes

• Saying the Payment of Gratuity Act, 1972 is still the only law on gratuity. Fix: Write that the Code subsumes it. Use the Act's name only as background.
• Saying the Code merges only gratuity, provident fund and ESI. Fix: Say the Code merges nine central social security laws, and gratuity is one of them.
• Rounding 4 years 10 months up to 5 years to claim eligibility. Fix: Eligibility needs service of not less than five years. Rounding applies only when computing the amount for a person already eligible.
• Dividing monthly wages by 30 or 25. Fix: Explanation 3 fixes the divisor at 26. Use monthly wages ÷ 26 × 15.
• Saying five years is compulsory in every case. Fix: Always add the second proviso: no five years for death, disablement, fixed term expiry or notified events.
• Quoting only the Payment of Gratuity Act, 1972 as the current law. Fix: Write that Section 164 of the Code repeals the 1972 Act and answer under Section 53 of the Code.
• Dividing monthly wages by 30 instead of 26 Fix: Explanation 3 to Section 53 says divide by 26 and multiply by 15 for monthly rated employees. Memorise 15/26.
• Rounding up when the part year is exactly six months Fix: The rule is part of a year in excess of six months. Exactly six months is not in excess, so it is ignored.
• Saying the employer need not act until the employee applies. Fix: Remember Section 56(2): the employer must determine the amount and give notice whether or not an application has been made.
• Calculating interest only from the 31st day. Fix: Interest runs from the date gratuity becomes payable to the date it is paid.

Exam tips

• For a short note, write in the order: meaning, 1972 Act, Code, Section 164, effect.
• Quote Section 164 by number only with its title, Repeal and savings.
• In MCQs, watch for options that say the 1972 Act continues unchanged, that savings are unconditional, or that the repeal applies before notification.
• Keep this topic short. Detailed marks come from eligibility, calculation and payment, so revise those topics too.
• In MCQs, watch the service period. 4 years 10 months fails the five-year test even though it rounds up for calculation.
• Memorise the divisor 26 and the 15 days. Show the formula line first in written answers to earn step marks.
• List the exceptions to the five-year rule: death, disablement, fixed term expiry, notified events. Examiners often build cases around them.
• Mention the ceiling is as notified by the Central Government. Do not quote a figure unless your question gives it.