India: Key Amendments In Payment Of Gratuity Act

Last Updated: 2 January 2019
Article by Roopa Somasundaran and Garima Mehra

The payment of Gratuity Act, came into existence on 21st August, 1972. The Act applied to only certain establishments prior to its amendment. The gratuity was paid to persons who are covered within the meaning of the term 'employee' under section 2(e) of the Act, subject to the conditions mentioned in Section 4 of the Payment of Gratuity Act, 1972.

The Payment of Gratuity Act, 1972 applies to the establishments employing 10 or more persons. The main purpose for enforcing this Act is to provide social security to workman after retirement, whether retirement is a result of superannuation, or physical disablement or impairment of body parts. Therefore, the Payment of Gratuity Act, 1972 is an important social security legislation to wage earning population in industries, factories and establishments. It is a welfare act and envisioned to those workman who renders their service for long period of time and they were considered as faithful employees. The employee has to complete at least 5 years in the organization to claim the gratuity amount.

Gratuity act is the primary act and considered to be a social security benefit for the employee. The amendment aims to double Gratuity limit from the previous limit of INR 1 million (approx. US$ 15,000) to INR 2 million (approx. USD 30,000). Gratuity payable as per the Payment of Gratuity Act, 1972 of India ("Gratuity Act"), is considered.

The Payment of Gratuity (Amendment) Act, 2018 received Presidential assent on 28th March, 2018 and came into force on 29th March, 2018 notified by the Ministry of Labour and Employment.
This amendment has aimed to ensure harmony amongst employees in the private sector and in Public Sector Undertakings/ Autonomous Organizations under the Government who are not covered under CCS (Pension) Rules. These employees will be entitled to receive higher amount of gratuity at par with their counterparts in the Government sector. An employee is entitled to receive gratuity if he has rendered continuous service for at least five years with an organization and usually given at the time of retirement under certain terms and conditions.
This gratuity is payable to the employee on his superannuation, or on his retirement or resignation or in case of Death or Disablement caused due to accident or disease.

After taking into consideration the increasing factors of inflation and wage relating to employees engaged in private sector, the Government decided that the entitlement of gratuity should also be revised in respect of employees who are covered under the Payment of Gratuity Act, 1972.

Key Amendments

The amendment has sidetracked the ceiling limit of the maximum amount of gratuity payable i.e Rs.10 lakh set in 2010. This upper cap prescribed by Section 4(3) of the Act, has been removed. Section 4(5) of the Act prescribes that if the terms of employment contract provide for a higher amount of gratuity over and above the ceiling limit stated in the Act, then the employee will be entitled to such higher amount. This transition has been introduced for the implementation of the 7th Central Pay Commission, whereby the ceiling of gratuity for Central Government employees has been enhanced from Rs. 10 lakhs to Rs. 20 lakhs. Instead of mentioning and specifying the ceiling amount in Act, the amendment empowers the Central Government to notify the ceiling proposed so that the limit can be revised from time to time keeping in view the increase in wage and inflation, and future Pay Commissions.

 Another significant feature was introduced in relation to the period of maternity leave. The period of maternity leave for females in continuous service was twelve weeks under section 2A of the earlier Act. The amendment has modified the maternity leave period from 'twelve weeks' to 'twenty-six weeks 'in order to keep the Act in tune with the recently amended Maternity Benefit Act. This also resolves calculation of continuous service for the payment of gratuity to employees who are on maternity leave.

ANALYSIS

Payment of Gratuity Act like the Minimum Wages Act, Employee State Insurance Act etc. which prescribes the pertinent minimum benefits must be made available to the employees. The Act is a welfare promising statute introduced in the interest of the general public to secure socio-economic justice to workmen, to assist them after retirement and to ensure them a decent standard of life. Therefore, it puts a stricter obligation on the employer to pay the gratuity amount.

Thus, The Amendment Act of 2018 brought two grave changes befitting the employees. Firstly, employees receiving a higher amount of gratuity payable by the employer as compared to that of 1972. Secondly, it enhances the maximum maternity leave period to 26 weeks against the backdrop of the Maternity Benefit (Amendment) Act, 2017. The entire duration of a female employee's statutory maternity leave will now be considered while calculating continuous period of service for gratuity payments. It would be in line with the entitlement of maternity leave under the Maternity Benefit Act, 1961. Thus, considering the dynamism in the environment, it is a requirement that employees should be provided with adequate beneficial terms and rewards for an appropriate sustenance of life.

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

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