Payment of Gratuity Act 1972

Labour laws derive their purpose, authority, and power from the Constitution of India. The Constitution of India protects and safeguards the rights of labour and human beings, under the Principles of State Policy on Fundamental Rights and Directive. With employment ending because of retirement or superannuation, the act allows the employee concerned to cope with a new situation which often involves a reduction in earnings or even a complete cessation of earnings. In death’s case of an employee, it offers much-needed financial support to the remaining members of the family. Gratuity schemes, therefore, act as instruments of social security and in developing countries such as India, where the general level of income is small, schemes such as this play a very important role in development at the individual level.


Labour policies have also been influenced by significant human rights conventions and standards that have developed from the United Nations. Earlier in India, there was no central statute to regulate the payment of gratuity and the scheme of gratuity was implemented in such establishments only where the employers were so kind and gracious to the employees, or where there was an arrangement between the employers and the staff. This scheme was limited to different institutions and, even within those institutions, to certain groups of employees. Judicial interpretations and identification of the need for an enactment that will secure the post-retirement life of employees persuaded the legislation to bring uniform legislation. For instance, Supreme court with Delhi Cloth and General Mills Co., Ltd. vs. Workmen and Ors. 1968 held that – “The object of providing a gratuity scheme is to provide a retiring benefit to workmen who have rendered long and unblemished service to the employer and contributed to the prosperity of the employer.” [1] This case laid out the need for an enactment that would provide social security to employees. Further, the Government of Kerala enacted the Kerala Industrial Employees Payment of Gratuity Act, 1970 and West Bengal Government enacted the West Bengal Employees Payment of Gratuity Act, 1971 therefore with an aim for uniform legislation this issue was discussed in the Labour Ministers’ Conference held in 1971 and the Indian Labour Conference held in 1971. The payments of the Gratuity Act, 1972 was enacted, largely based on the West Bengal legislation, which came into force on 16th September 1972.[2] However, the legislature has bought necessary changes into the act with the changing time.


Section 1 of the Act describes the application of Act, as discussed above the payment of gratuity act covers all the employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. Section 1(3) Further specifies the act i.e.,  the act shall apply to every shop or establishment within any law in which ten or more persons are employed or have been employed, on any day of the preceding twelve months and for the time being in force in relation with shops and establishments in a State;

The legislature has amended the act from time to time to widen its scope and as a result now Any shop or business shall continue to be regulated by the Act even though, at any point, the number of its employees is below 10 people. This Act also includes public charitable and religious trusts, given that they are shops or businesses within the Shops and Establishment Act apply to their area of activity and that 10 or more persons were employed by them on any day in the preceding 12 months.[3] Enactment is further defined by the judiciary in several cases. For instance in Municipal corporation of Delhi V Smt. V.T. Naresh and Ors, it was held that – “a Corporation and/or Local Authority are included within the definition of “establishment” It will notice that the word “establishment” used in the aforesaid clause of Payment of Gratuity Act, 1972 is not controlled by any establishment. It will include commercial, public sector establishment, private sector establishment as also the non-commercial establishment.”[4]

Salient Features

  1. The Act is self-contained and exhaustive along with this Act; the Rules made under it have an overriding effect on all other acts or instruments or contracts in so far as they are inconsistent with this Law.
  2. The Act is relatively broad in terms of scope, as it extends to all factories, mines, oil fields, farms, ports, and railways irrespective of the number of workers they employ. This also includes shops and establishments which employ 10 people or more.
  3. The Act grants a statutory right of gratuity to all employees who have worked for five years continuously and whose services are terminated based on superannuation or retirement or resignation or death or disability after the Act has come into force.
  4. The Act provides both executive and quasi-judicial mechanisms for matters related to nomination, determination, and recovery of gratuity.
  5. Executive machinery shall be concerned with the maintenance of records relating to the opening, modification or closure of establishments, the display of notices, and the maintenance of records by the governing authority. The quasi-judicial functions have been divided between the employers and the governing authority in matters pertaining to the payment of gratuities; the first forum provided is an application to the employer. If the employer has declined or avoided payment of the gratuity, then the governing authority is required to make an application.
  6. The machinery given for recovery shall rest with the Controlling Authority.
  7. Orders of the Controlling Authority for payment or determination of gratuities can be appealed to the relevant Government or appeal authority.[5]


Section 2(e) of the Act defines ’employee’ as any person working for wages, whether the terms of such employment are express or implied, in any kind of work, manual or otherwise, in or in connection with the work specified in the Act, however, Section 2A of the gratuity act defines continuous service, it states that

An employee of a seasonal establishment is deemed to be in continuous service for twelve or six months; if the employee worked for not less than seventy-five percent of the number of days on which the establishment was in operation during that period. However, continuous service shall be interrupted because of an accident, illness, absence from duty with no leave, leave, lay-off, lock-out, strike, or termination of work which is not because of any fault of the employee, and shall be regarded as continuous service.

 it shall also include the following days in the actual’s calculation working days of the employee:

  1. If they have laid the employee off under an agreement
  2.  If the employee has been on leave with full pay
  3. If the employee has been absent from duty because of a temporary disability caused by an accident resulting from and in the course of his employment,
  4. Maternity leave for a female employee, not over twenty-six weeks

If the employee is not in continuous service for one year – he/she shall be considered to be in continuous service for one year,  if- he/she has, in immediately preceding twelve calendar months, served under the employer for not less than:

  1. 190 Days in case of employees used in mines below ground.
  2. It employs 190 Days in case employees in an establishment that works for less than six days a week.
  3. 240 Days ( in any other case).

If in case an employee is not in continuous service for six months –  they shall deem such person to be in continuous service of six months if such employee has, immediately preceding six calendar months, worked under the employer for not less than:

  1.  95 Days in case of employees used in mines below ground.
  2. It employs 95 Days in case employees in an establishment that works for less than six days in a week.

120 Days in any other case.[6]


Section 9 of the payment of the gratuity Act imposes certain penalties for failure to comply with the Payment of Gratuity Act 1972.

  1.  The law imposes imprisonment up to 6 months or fine up to Rs. 10,000.00 or both to employers who avoid payment or knowingly makes any false statement or representation
  2.  A person shall be punishable with imprisonment up to 1 year but not less than 3 months or with a fine not less than Rs. 10,000.00 but may be extended to Rs. 20,000.00 or both for not complying with any provision of the Act or Rules

An employer shall be liable to imprisonment for a term which shall not be less than 6 months but may extend to 2 years, for an offense relating to non-payment of gratuity, however, the court may reduce the imprisonment or fine.


The Payment of Gratuity Act was enacted with a view of providing economic security to the employees, India having a robust constitution, protects the rights of all its citizens, Payment of gratuity act has been successful in securing the post-retirement life of an employee. The law has been amended from time to time to make it relevant to the prevailing situation and Parliament and the judiciary have been successful in providing a broader perspective on the legislature’s scope for reaching the fully deserved workers in its domain.

Frequently Asked Questions (FAQs)

  1. What is the background of the act?
  2. What is the act?
  3. What are the salient features of the act?
  4. What is the eligibility to claim gratuity?
  5. What is the penalty for non-compliance with the act?


[1] Delhi Cloth and General Mills Co., Ltd. vs. Workmen and Ors, MANU/SC/0271/1968.

[2] Kush, G. Payment of Gratuity Act, 1972 An Assessment.

[3] Prachi Agrawal. (2014). Payment of Gratuity Act, 1972: A Critical Analysis

[4] Municipal Corporation of Delhi  vs. V.T. Naresh and Ors, MANU/DE/0146/1985.

[5] Salient Features of the Act. In Introduction to Labour and Industrial Law. India: LexisNexis.

[6] Gratuity, from India Law Office.

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