What is the maximum amount of gratuity payable to the employees under the Payment of Gratuity Act, 1972 ?

Correct — D, (d) ₹ 20,00,000. The ceiling on gratuity lives in section 4(3) of the Payment of Gratuity Act, 1972, and the figure a candidate has to carry is twenty lakh rupees. Two instruments put it there and the pair is worth knowing, because the Act itself no longer prints a number. Until 2018 sub-section (3) read that the amount of gratuity payable to an employee 'shall not exceed ten lakh rupees'. The Payment of Gratuity (Amendment) Act, 2018 (Act 12 of 2018) took that figure out of the statute and substituted 'such amount as may be notified by the Central Government', so that the ceiling could be moved by executive notification whenever pay levels moved, instead of waiting for Parliament each time. The Central Government then exercised exactly that power: notification S.O. 1420(E) of 29 March 2018, issued under sub-section (3) of section 4, specified that the amount of gratuity payable shall not exceed twenty lakh rupees, and the amending Act was brought into force the same day. So the answer sits in the Act read with its notification, which is why the figure cannot be found by reading the bare section alone. Two things the ceiling does not do are worth fixing at the same time. It does not decide how much gratuity is earned — that is section 4(2), fifteen days' wages for every completed year of service (and for any part of a year in excess of six months) on the wages last drawn, worked out for a monthly-rated employee as monthly wages × 15 ÷ 26. And it does not cap what an employer may choose to pay: section 4(5) preserves an employee's right to better terms of gratuity under any award, agreement or contract, so the ceiling limits the statutory entitlement, not generosity above it.

Why the others are wrong

• (a)₹ 5,00,000 — Five lakh rupees has never been the ceiling in section 4(3) at any point in the Act's life. The figure in that sub-section moved ₹3,50,000 (fixed with effect from 24 September 1997 by the Payment of Gratuity (Amendment) Act, 1998) to ₹10,00,000 (Payment of Gratuity (Amendment) Act, 2010) to ₹20,00,000 (notified in 2018). Five lakh is a round number that belongs to no stage of that ladder, and it is not the income-tax exemption figure either — the exemption for gratuity under section 10(10) of the Income-tax Act tracks the same twenty-lakh limit for covered employees.
• (b)₹ 10,00,000 — This is the trap, and it is a trap made of a genuinely correct fact that has expired. Ten lakh rupees was the ceiling written into section 4(3) by the Payment of Gratuity (Amendment) Act, 2010, and it would have been the right answer to this question on any paper set between 2010 and 28 March 2018. The 2018 amendment removed it. A candidate who learnt gratuity from an older set of notes and never re-read the section picks this one confidently.
• (c)₹ 15,00,000 — Fifteen lakh has never appeared in section 4(3). It is attractive because it sits neatly between the old ceiling and the new one and looks like the kind of intermediate revision a government might have made. The number fifteen does belong to this Act — but as the fifteen days' wages per completed year in the section 4(2) formula, not as a rupee ceiling. Options built by putting a familiar number in an unfamiliar slot are common in this paper's labour-law blocks.

Gratuity is a lump sum an employer pays for long service, and the Payment of Gratuity Act, 1972 makes it a statutory obligation rather than a matter of grace. Section 1(3) applies the Act to every factory, mine, oilfield, plantation, port and railway company, and to every shop or establishment in which ten or more persons are employed or were employed on any day of the preceding twelve months — and once the Act has applied to an establishment it continues to apply even if the headcount later falls below ten. Section 4(1) makes gratuity payable on the termination of employment after five years of continuous service, on superannuation, on retirement or resignation, or on death or disablement due to accident or disease; the five-year condition is expressly not required where the termination is caused by death or disablement. Section 2A defines continuous service and supplies the deemed-service rules that decide borderline cases. Section 4(2) fixes the rate: fifteen days' wages for every completed year of service, and for a monthly-rated employee those fifteen days are computed at monthly wages × 15 ÷ 26, the twenty-six standing for working days in a month. Section 4(3) then caps the total, and since 2018 the cap is whatever the Central Government notifies — currently ₹20,00,000. Section 4(6) allows forfeiture, wholly or partly, where the employee's services were terminated for wilful damage, riotous or disorderly conduct, or an offence involving moral turpitude committed in the course of employment. Section 7 runs the machinery: the employer must determine and pay the amount within thirty days of it becoming payable, and section 7(3A) makes simple interest payable on delay.

Key facts

• Payment of Gratuity Act, 1972, section 4(3): the amount of gratuity payable shall not exceed such amount as may be notified by the Central Government — the words substituted for 'ten lakh rupees' by the Payment of Gratuity (Amendment) Act, 2018 (Act 12 of 2018).
• Notification S.O. 1420(E) dated 29 March 2018, issued under section 4(3), fixed the ceiling at ₹20,00,000; the amending Act was brought into force on the same date.
• The ceiling in section 4(3) has moved ₹3,50,000 (with effect from 24 September 1997) to ₹10,00,000 (2010) to ₹20,00,000 (2018).
• Section 4(2): fifteen days' wages for every completed year of service and for any part of a year in excess of six months; for a monthly-rated employee, fifteen days' wages = last drawn monthly wages × 15 ÷ 26.
• Section 4(1): five years of continuous service is the qualifying condition, but it is not required where employment ends because of death or disablement.
• Section 4(5) preserves better terms of gratuity available under an award, agreement or contract, so an employer may pay above the ceiling; the ceiling limits only what the Act compels.
• Section 7(3) requires payment within thirty days of the amount becoming payable, and section 7(3A) attaches simple interest to delayed payment.
• The Code on Social Security, 2020 subsumes the Payment of Gratuity Act and keeps the same design — a gratuity ceiling that the Central Government notifies rather than a figure fixed in the body of the statute.

Common traps

• Answering with ₹10,00,000, which was right before 29 March 2018 and has been wrong since. Statutory-figure questions punish outdated notes harder than any other kind.
• Looking for the number in the text of section 4(3) and concluding the Act does not fix one. Since 2018 the section points to a notification; the figure is in S.O. 1420(E).
• Confusing the ceiling on the amount with the rate at which it accrues. Fifteen days' wages a year is section 4(2); twenty lakh rupees is section 4(3).
• Assuming an employer cannot pay more than the ceiling. Section 4(5) expressly protects better contractual or award terms.
• Assuming five years of service is always needed. Death and disablement are the two statutory exceptions in the proviso to section 4(1).

• practice — not a real PYQ

  Under the Payment of Gratuity Act, 1972, gratuity is payable to an employee on the termination of employment after he has rendered continuous service for not less than five years, except where the termination is due to :

  • (a)Resignation or retirement
  • (b)Superannuation
  • (c)Death or disablement
  • (d)Closure of the establishment

  Answer(c) Death or disablement

• practice — not a real PYQ

  For a monthly rated employee, the gratuity payable for each completed year of service under section 4(2) of the Payment of Gratuity Act, 1972 is calculated at fifteen days' wages arrived at by multiplying the last drawn monthly wages by :

  • (a)15/30
  • (b)15/26
  • (c)15/24
  • (d)15/31

  Answer(b) 15/26