In which of the following situations will gratuity be payable to Mr. ‘X’ under the Payment of Gratuity Act, 1972 ? 1. Mr. ‘X’ resigns from the industry after rendering continuous service for six years 2. Mr. ‘X’ dies due to an accident in the industry after rendering continuous service for two years 3. Mr. ‘X’ retires from the industry after rendering continuous service for five years Select the answer using the codes given below :

Correct — B, (b) 1, 2 and 3. Gratuity is payable in all three situations, and the provision that settles it is section 4(1) of the Payment of Gratuity Act, 1972 together with its first proviso.

Section 4(1): gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than FIVE YEARS — (a) on his superannuation, or (b) on his retirement or resignation, or (c) on his death or disablement due to accident or disease. The first proviso then removes the qualifying period for two of those cases: 'the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.'

Entry 1 — resigns after six years' continuous service. PAYABLE. Resignation is expressly named in clause (b), and six years clears the five-year qualifying period. Resignation is worth noting for its own sake, because a common misbelief is that gratuity rewards only those who stay to retirement; the Act treats resignation on the same footing as retirement once five years are complete.

Entry 2 — dies due to an accident in the industry after two years' continuous service. PAYABLE. Death is clause (c), and the first proviso disapplies the five-year requirement altogether where termination is due to death or disablement. Two years is therefore no obstacle. Section 4(1) also directs that in the case of death the gratuity be paid to the nominee, or where there is no nomination to the heirs, and section 4(2)'s further proviso protects a minor's share by requiring it to be deposited with the controlling authority and invested for his benefit until he attains majority.

Entry 3 — retires after five years' continuous service. PAYABLE. Retirement is clause (b), and the statutory threshold is 'not less than five years', so exactly five years qualifies. The wording matters: a candidate who reads the requirement as 'more than five years' would wrongly reject this entry.

All three qualify, so the answer is (b).

Why the others are wrong

• (a)3 only — This accepts only the retirement at five years and rejects the other two, but both of those are squarely within section 4(1). Resignation after six years is clause (b) read with the five-year qualifying period, which six years satisfies with a year to spare; the Act draws no distinction between leaving voluntarily and retiring on age, once the qualifying service is complete. Death after two years is clause (c) read with the first proviso, which dispenses with the five-year requirement where termination is due to death or disablement. Rejecting both requires two separate misreadings of the same sub-section.
• (c)1 and 3 only — This is the option a candidate reaches by applying the five-year rule mechanically to all three entries: it accepts the six-year resignation and the five-year retirement and rejects the two-year death. The whole of the first proviso to section 4(1) is directed against exactly that reading — 'the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement'. The policy is plain enough: a qualifying period exists to reward length of service, and a worker killed in the second year has not chosen to leave. Note that the proviso covers disablement as well as death, and section 2(b) defines disablement as such disablement as incapacitates an employee for the work he was capable of performing before the accident or disease resulting in it.
• (d)1 and 2 only — This accepts the resignation and the death but rejects the retirement at exactly five years, which can only rest on reading section 4(1) as requiring MORE than five years. The section says 'after he has rendered continuous service for not less than five years', and 'not less than' includes five. The point is reinforced by section 2A, which defines continuous service and provides the deeming rules by which an employee counts as being in continuous service for a year where he has actually worked for 240 days in the preceding twelve months, or 190 days in an establishment working fewer than six days a week or in a mine. Five completed years of such service is enough, and the Supreme Court's treatment of the 240-day rule means even a year with breaks may count.

The Payment of Gratuity Act, 1972 pays a terminal benefit for length of service, and section 4 is the heart of it. Gratuity is payable on termination after not less than five years' continuous service, on superannuation, retirement or resignation, or on death or disablement due to accident or disease — with the five-year condition disapplied for death and disablement by the first proviso. The amount is fixed by section 4(2): fifteen days' wages based on the rate of wages last drawn for every completed year of service or part in excess of six months, computed for a monthly-rated employee by dividing the monthly wage by twenty-six and multiplying by fifteen; for a piece-rated employee on the average of the last three months' wages; and for a seasonal establishment at seven days' wages for each season. Section 4(3) caps the amount at such sum as the Central Government may notify, and the notified figure is ₹ 20,00,000, in force since 29 March 2018 — a figure that reached the section by amendment, the Payment of Gratuity (Amendment) Act, 2018 having replaced the earlier words 'ten lakh rupees' with a power to notify. Section 4(6) allows forfeiture: wholly or partly where the termination is for an act of wilful omission or negligence causing damage or loss, and wholly where it is for riotous or disorderly conduct or any act of violence, or for an offence involving moral turpitude committed in the course of employment. Section 2A defines continuous service and its 240-day and 190-day deeming rules; section 4A requires the employer to obtain compulsory insurance for his gratuity liability; sections 7 and 8 govern determination, the thirty-day payment deadline, interest on delay and recovery as an arrear of land revenue.

Key facts

• Payment of Gratuity Act, 1972, section 4(1) — gratuity is payable on termination after not less than five years' continuous service, on superannuation, on retirement or resignation, or on death or disablement due to accident or disease.
• First proviso to section 4(1) — the five-year requirement does not apply where termination is due to death or disablement.
• 'Not less than five years' includes exactly five years.
• In the case of death, gratuity is payable to the nominee, or where there is no nomination, to the heirs; a minor's share is deposited with the controlling authority and invested for his benefit.
• Section 4(2) — fifteen days' wages for every completed year of service or part in excess of six months, computed for monthly-rated employees by dividing the monthly wage by twenty-six.
• Section 4(3) — the amount is capped at such sum as the Central Government notifies; the figure is ₹ 20,00,000 with effect from 29 March 2018.
• Section 2A — continuous service, including the deeming rules of 240 days in a year, or 190 days in a mine or an establishment working fewer than six days a week.
• Section 4(6) — forfeiture, partly or wholly for damage or loss caused by wilful omission or negligence, and wholly for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment.
• Section 4A — every employer other than Government must obtain insurance for his gratuity liability, unless he has an established and registered gratuity fund.
• Section 7 — gratuity must be paid within thirty days of its becoming payable, failing which simple interest is payable.

Common traps

• Applying the five-year rule to death or disablement. The first proviso removes it in exactly those cases.
• Reading 'not less than five years' as more than five. Exactly five years qualifies.
• Assuming resignation forfeits gratuity. Section 4(1)(b) names resignation alongside retirement.
• Confusing the qualifying period of five years with the fifteen-days-per-year rate of payment.
• Working the option ladder by position — the options here are not in ascending order.

• practice — not a real PYQ

  An employee dies in an accident after rendering three years of continuous service. Under the Payment of Gratuity Act, 1972, gratuity is :

  • (a)Not payable, because five years of continuous service have not been completed
  • (b)Payable, because the five-year requirement does not apply where termination is due to death
  • (c)Payable at half the normal rate
  • (d)Payable only if the employer has taken insurance under section 4A

  Answer(b) Payable, because the five-year requirement does not apply where termination is due to death

• practice — not a real PYQ

  Under section 4(2) of the Payment of Gratuity Act, 1972, gratuity for a monthly-rated employee is computed at fifteen days' wages for every completed year of service, the daily wage being arrived at by dividing the monthly wage by :

  • (a)Twenty-two
  • (b)Twenty-four
  • (c)Twenty-six
  • (d)Thirty

  Answer(c) Twenty-six