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For decades, the Payment of Gratuity Act, 1972 ("Act"), stood as a pillar of employee security, a testament to the value of long-term dedication. Today, the Code on Social Security, 2020 ("Code"), builds on this foundation with a bold, unified vision. With gratuity now a central pillar of its new framework (Chapter V), the Code not only honours the past but ushers in a new era of comprehensive financial security for all of India's workers.
A. Comparative Analysis of Key Provisions – Old v. New:
|
Enactment |
Payment of Gratuity Act, 1972 ("Act") |
Consolidated under Code on Social Security, 2020 ("Code") |
|
Coverage |
Applies to establishments with ≥10 employees (Section 1) |
The Code maintains the requirement of minimum 10 employees but extends coverage to include workers in the unorganized sector through specific schemes and notifications (Section 1) |
|
Eligibility |
Continuous service of 5 years required (except in case of death/disability) (Section 4) |
Similar, but fixed-term employees are eligible without the 5-year requirement (pro-rata basis) (Section 53) |
|
Calculation of Gratuity |
Gratuity is calculated at the rate of 15 days' wages for each completed year of service, based on the last drawn salary. For calculating 15 days' wages, a month is considered as 26 days |
Maintains the same calculation method as the Act. For seasonal employees, gratuity is calculated at the rate of 7 days' wages for each season |
|
Definition of Wages |
Basic + Dearness Allowance + certain allowances; exclusions were ambiguous (Section 2 s) |
A more exhaustive and uniform definition of 'wages', excluding House Rent Allowance, bonuses, etc. [Section 2 (88)] |
|
Time Limit for Payment |
Within 30 days of it becoming due |
Same timeline retained |
|
Interest on Delay |
Mandatory interest if not paid within 30 days |
Same provision retained |
|
Maximum Gratuity Amount |
The maximum amount of gratuity payable is Rs. 20 lakhs (as amended over time from the original Rs. 10 lakhs). |
Maintains the same ceiling of Rs. 20 lakhs but provides for the central government to increase this amount by notification |
|
Exemptions |
Certain employees under the Central/state government or other laws may be exempt |
Retains similar exemptions, subject to conditions notified by the appropriate government |
|
Administration |
Labour Commissioner / Controlling Authority |
Centralised, under Inspector-cum-Facilitator under the new code |
B. Key Impact on Employers-
Expanded Coverage- Gratuity is now extended to fixed-term contract employees on a pro-rata basis, regardless of the five-year service rule. This will increase the financial obligations for companies that rely on fixed-term employment.
Wages Redefined- The new code broadens the definition of "wages," potentially increasing the gratuity calculation base leading to a higher payout for employees and a corresponding increase in liability for employers.
Mandatory Insurance- Many employers are now required to obtain mandatory gratuity insurance to cover their obligations, representing an additional, recurring cost for them.
Increased Costs- These changes can lead to higher financial liabilities for businesses and increased administrative burdens. The process for calculating and making gratuity payments will also need to be adjusted to reflect the new code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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