Payment of Gratuity Act, 1972

What is Payment of Gratuity Act, 1972?

The Payment of Gratuity Act, 1972 applies to factories, mines, plantations, ports, railways, shops, and establishments with 10 or more employees. An employee qualifies after 5 years of continuous service, except in cases of death or disability where the 5-year condition is waived. Gratuity is calculated as 15 days of last drawn basic + DA for every completed year of service, with any period above 6 months counted as a full year. The tax-free ceiling under Section 10(10) of the Income-tax Act is ₹20 lakh. Employers must obtain insurance under Section 4A or set up an approved gratuity trust. Form F is the nominee declaration, and Form I is the claim form.

Formula: Gratuity = (Last drawn basic + DA) x 15/26 x completed years of service

Example

Priya retires after 12 years and 7 months with last drawn basic + DA of ₹52,000. Service rounds to 13 years. Gratuity = 52,000 x 15/26 x 13 = ₹3,90,000.

How Payment of Gratuity Act, 1972 is used

Calculate gratuity at exit (resignation, retirement, death, or termination after 5+ years). Pay within 30 days of due date or 10% simple interest applies.

Payment of Gratuity Act, 1972 FAQs

Who is covered under the Payment of Gratuity Act?

Any establishment with 10+ employees on any day in the preceding 12 months. Once covered, the Act continues to apply even if the count later falls below 10.

What happens if the employer delays gratuity payment?

Section 7(3A) makes the employer liable to pay simple interest at the rate notified by the central government (currently 10% p.a.) for the period of delay beyond 30 days.

Is gratuity taxable in India?

For employees covered under the Act, gratuity is tax-free up to ₹20 lakh under Section 10(10)(ii). Amounts above this ceiling are taxed as salary income in the year of receipt.