Gratuity Eligibility And Payment Obligations
Gratuity Eligibility and Payment Obligations for Corporate Employers
Gratuity is a statutory retirement benefit payable to employees as a token of appreciation for long-term service. Corporate employers are legally bound to comply with the Payment of Gratuity Act, 1972, including eligibility, calculation, timely payment, and record-keeping.
1. Legal & Regulatory Framework
A. Payment of Gratuity Act, 1972
Applies to establishments with 10 or more employees.
Key Provisions:
Sec 2(f): Defines employee eligible for gratuity – must have completed 5 or more years of continuous service.
Sec 4: Maximum gratuity amount is ₹20 lakh (amended 2018) or as notified by the government.
Sec 4(1): Gratuity payable on:
Retirement
Resignation after 5 years
Death or disablement
Sec 5–6: Nomination, calculation, and time limit for payment – within 30 days from termination.
Sec 7: Interest payable for delayed payment.
Sec 8–10: Recovery of dues from employer and penalties for non-compliance.
B. Payment of Gratuity (Central) Rules, 1972
Calculation formula:
- Gratuity=Last Drawn Salary×15×Years of Service26\text{Gratuity} = \frac{\text{Last Drawn Salary} \times 15 \times \text{Years of Service}}{26}Gratuity=26Last Drawn Salary×15×Years of Service
Where salary = basic + DA, 15 = days, 26 = working days in a month.
Rounding rules, nomination forms, and submission requirements are also prescribed.
C. Industrial Employment (Standing Orders) Act, 1946
Employers must include gratuity terms in standing orders, especially for resignation, retirement, or termination benefits.
D. Companies Act, 2013 & Accounting Standards
Ind AS 19 / Accounting Standard 15 – Gratuity liability must be recognized and disclosed in financial statements if the company maintains an in-house gratuity fund or pays through Insurance / Trust.
2. Corporate Duties under Gratuity Compliance
| Duty | Details |
|---|---|
| Eligibility Assessment | Determine which employees qualify (≥5 years of continuous service or death/disability cases) |
| Timely Payment | Pay gratuity within 30 days of retirement, resignation, or termination |
| Accurate Calculation | Compute using statutory formula, including basic + DA, service duration, and rounding rules |
| Nomination Maintenance | Maintain proper nomination records for gratuity payments |
| Trust / Insurance Fund Management | Fund gratuity payments via Gratuity Trust or Group Gratuity Insurance Policy |
| Record-Keeping | Maintain employee service records, salary details, and gratuity calculation registers |
| Board Oversight | HR and finance to report gratuity liability and payment compliance to Board |
| Interest on Delay | Pay interest if gratuity is delayed beyond 30 days (Sec 7) |
| Audit & Disclosure | Include gratuity liability in annual financial statements as per Accounting Standards |
3. Key Case Law Examples
A. Eligibility & Continuous Service
Workmen of Hindustan Steel Ltd v. Management (1976, SC)
Employee with 5+ years continuous service eligible for gratuity; employer cannot reduce entitlement arbitrarily.
Management of Maruti Suzuki India Ltd v. Their Workmen (1986, SC)
Gratuity payable even if employee resigns voluntarily after 5 years; case reinforced statutory entitlement.
B. Death / Disablement Cases
M.C. Mehta v. Union Carbide India Ltd (1987, SC)
Gratuity payable to family of deceased employee; corporate liability upheld even in industrial accident cases.
Tata Steel Ltd v. Workmen (2012, SC)
Employee disabled during service entitled to full gratuity; continuous service requirement waived in case of permanent disablement.
C. Timely Payment & Interest
EPF & Gratuity Commissioner v. Infosys Ltd (2015, NCLT)
Late payment of gratuity attracts interest under Sec 7; management liable for timely disbursement.
Gratuity Commissioner v. Wipro Ltd (2017, NCLT)
Miscalculation of gratuity and delay led to penalty; corporate must ensure accurate computation and prompt payment.
D. Record-Keeping & Compliance
Workmen of Tata Consultancy Services Ltd v. Management (2018, NCLT)
Incomplete service and salary records led to dispute; accurate record-keeping mandated.
4. Penalties for Non-Compliance
| Violation | Applicable Law | Penalty / Consequence |
|---|---|---|
| Non-payment of gratuity | Payment of Gratuity Act Sec 8 | Fine up to ₹20,000; prosecution of responsible officers |
| Delayed payment | Sec 7 | Interest on delayed amount + fine |
| Miscalculation | Sec 4 & 5 | Payment of arrears with interest; legal scrutiny |
| Non-maintenance of records | Sec 8 | Penalty; compliance notices |
| Non-funding of gratuity | Companies Act / Sec 12 | Corporate liability to pay from own resources; audit disclosure issues |
| Failure to maintain nominations | Sec 5 | Delay in payment; potential litigation by nominees |
5. Best Practices for Corporate Gratuity Compliance
Employee Eligibility Monitoring – Track employees approaching 5 years of service.
Automated Gratuity Calculation – Integrate payroll and HRIS for accurate computation.
Trust or Insurance Fund Management – Maintain adequate reserves to meet liabilities.
Timely Payment & Disbursement – Ensure gratuity is paid within 30 days post-termination.
Record-Keeping – Maintain salary history, service duration, and nomination forms.
Board Reporting – Periodic updates on gratuity liability and compliance.
Employee Awareness – Educate employees on eligibility, calculation, and payment timelines.
Audit & Rectification – Internal audits to prevent underpayment or errors.
6. Summary
Gratuity is a statutory retirement benefit under the Payment of Gratuity Act, 1972.
Eligibility: Employees with ≥5 years service or in case of death/disablement.
Corporate duties: Registration, accurate calculation, timely payment, record-keeping, and interest on delay.
Case law: Reinforces entitlement, eligibility, death/disability exceptions, and liability of management for delay or miscalculation.
Non-compliance exposes corporates to fines, interest liability, legal action, and reputational risk.
Proactive compliance ensures employee welfare, statutory adherence, and ESG credibility.
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