Labour Laws

The Payments of Gratuity Act, 1972

A gratuity (or a tip) is an aggregate of money which a client or customer provides to a service worker in addition to the basic pay. A Company provides tipping to the service sector workers for their respective services. It is different from the money which is part of the purchase price. The exchange or transfer of such amount is generally irreversible making it different from the amount which is refundable. In this article, we will article, we will discuss the various aspects of the Gratuity Act.

Gratuity Act

Application of Act

The Gratuity Act is applicable to the whole of India. But according to section 1(2), for other than plantation or ports, it is not applicable to the State of Jammu and Kashmir. This act applies to all factories, mines, oilfields, plantation, ports, and railway companies.

But in the case of shops or establishments other than those stated before, it applies to all those organizations which have 10 or more employees in the preceding year.

Under Section 1(3-A), if in a shop or related establishment, the number of workers reduces from 10 even then this act will continue to govern them. Thus no employer or company can try to escape its liability under this act by reducing their number of employees.

Under Section 2(e), no provision of this act is applicable to Apprentices and Persons who have civil posts under the Central Government or State Government and are subject to any other actor rule other than this act.


Under Section 4, payment of gratuity is necessary. Gratuity should be payable to an employee on termination of employment after his continuous service for not less than 5 years in a single organization. The termination can be due to :

  • Superannuation
  • Disablement due to accident or any specific disease
  • Retirement

As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or any other reason which is out of control of the employee. In such cases, the necessary gratuity is payable.

Calculation Formula

Gratuity in India is calculated using the below-given formula:

Gratuity provided = Last Drawn Salary × 15/26 × No. of Years of Service


  • The ratio 15/26 shows 15 days out of 26 working days in a month (reduced by 4 Sundays)
  • Last drawn salary = Basic Salary + Dearness Allowance (DA)
  • The Years of Service are rounded down to the nearest full year. Eg., if the employee has a complete service of 20 years, 10 months and 25 days then 21 years will be taken into the calculation.

Tax Exemption

Gratuity received by the employee under the Gratuity Act is exempt from taxation to the extent that it does not exceed 15 days’ salary for every completed year of service subject to a maximum of Rs. 30 lakh.

Any other gratuity which is exempt to the extent that it does not exceed one 1/4th salary for each year of completed service calculated on the basis of the average salary for immediately 10 preceding months. The upper limit of Rs.30 lakhs is applicable to the aggregate of gratuity received from one or more employers in the same years.

Question on Gratuity Act

Question: Calculate the Gratuity if the last drawn salary is Rs. 20000 and the number of years of service are 5 years.

Solution: Amount of Gratuity = \( {20000}\times{15} \) / \( {26}\times{5} \) = Rs. 57692 (approx.)

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One response to “Labour Law Compliance Rules”

  1. Aakla says:

    Thanks for sharing this information with us, I learn about labour-law-compliance-rules from your blog.

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