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This edition will provide you with a brief analysis of the Payment of Gratuity Act, 1972. The act provides for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto.
The Burning Tale
1. What is gratuity?
Gratuity is given by the employer to their employee for the services rendered by him/her during the period of employment. It is the monetary amount which is payable to the employee of an organisation. This is mainly paid to the employee as a token of appreciation for his/her services towards the company. Gratuity payment is one of the several components that make up the gross salary of the employee. It is usually paid at the time of retirement but can be paid earlier, provided certain conditions are met.
2. History of the act
Previously the scheme of gratuity was confined to particular establishments and even within those establishments, to certain categories of staff Industrial However, disputes on the subject and their awards and decisions of the Tribunals and court brought the revolutionary changes in the Indian industrial sector.
The West Bengal Government enacted the West Bengal Employees Payment of Gratuity Act, 1971 relating to the subject. The other states were also thinking to legislate such enactments.
Gradually, it was felt that there should be uniform central legislation for the whole country instead of state legislations for each and every separate state.
Accordingly, the payments of the Gratuity Act, 1972 was enacted, largely based on the West Bengal legislation, which came into force
3. How does Gratuity work?
The employer may either pay their employees the gratuity amount from their own account or opt for a general gratuity insurance plan with a service provider. The company then pays annual contributions to the service provider, and in return, the insurance company can pay the gratuity amount to the employee, by following the policy rules and regulations. The gratuity amount is totally paid by the employer without any contributions from the employee.
4. Applicability of the act
a) Every Factory (as defined in Factories Act), mine, oilfield, plantation, port & railway.
b) Every shop or establishment within the meaning of any law for the time being in force in relation to Shops & Establishments in a State, in which 10 or more persons are employed, on any day of the preceding 12 months.
c) Once the Act applies, it continues to apply even if employment strength falls below 10.
5. Who is elegible?
An employee is eligible to receive gratuity when –
a) They resign after working for five years with a single employer
b) They retire from work
c) They suffer disability or pass away due to accident or illness (5 year clause not applicable in this case)
6. Important points to know while calculating gratuity
a) The Payment of Gratuity Act, 1972 has divided non-government employees into two categories: Employees covered under the Act Employees not covered under the Act
b) To calculate the number of years for the gratuity calculation, anything above 6 months is rounded off to the next number and anything below 6 months will be rounded off to the previous number.
c) For example, if you have worked at an organisation for 8 years and 7 months, then the number of years will be calculated as 9 years whereas if an employee has worked for a company for 8 years and 4 months, then it will be considered as 8 years only.
BONUS: We have made a detailed video on Payment of Gratuity Act, 1972 and the calculation of gratuity. Click here to watch the video.
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Editorial Team: Divyam Jain, Loveleen Kaur
Design: Anirudh Sharma