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The Payment of Gratuity Act, 1972


The Act applies to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments with 10 or more employees.

Once Act applies, it continues to apply even if employment strength falls below 10 employees.


To fall under the Act, an employee needs to have at least 5 full years of service with the current employer to qualify for gratuity, except in the event that an employee passes away or is rendered disabled due to accident or illness, in which case gratuity must be paid.

Gratuity is paid when an employee:

Is eligible for superannuation;
Resigns; or
Passes away or is rendered disabled due to accident or illness (if an employee passes away, gratuity will be paid to the employee's nominee).


Gratuity = Last Drawn Salary x 15/26 x Completed years of Service (including a part of year in excess of six months)


  • The ratio 15/26 represents 15 days out of 26 working days in a month
  • Last drawn salary = Basic Salary + Dearness Allowance

Employees covered under the Act are entitled for maximum amount of gratuity of Rs. 10, 00,000/-

Any amount exceeding the maximum prescribed limit of Rs. 10, 00, 000/- becomes taxable in the hands of the recipient.


The Gratuity Act provides the provision of imprisonment for a term (extendable to six months) or fine (extendable to ten thousand rupees) or both to person/persons who makes false statement for purpose of delaying or avoiding gratuity amount