The Payment of Gratuity Act, 1972

What it does

The Act gave an employee a statutory right to gratuity, a lump sum paid by the employer when employment ends after long service. The qualifying service was generally five years of continuous service, with the exception of an end of employment by death or disablement. The amount was fifteen days' wages for each completed year of service, worked out on the formula of 15/26 of the monthly wage, and the Act capped the sum. The Act also provided for a controlling authority to decide a dispute over payment and for the employer to be liable to pay interest on a delayed payment.

The Act has been replaced. The Code on Social Security, 2020 absorbs its subject, and the labour codes came into force on 21 November 2025. The page is therefore about a repealed instrument that still governs past service and pending matters as the repeal and savings provision of the Code provides, and it does not assert more than that.

Who it binds

Employers in the classes of establishment the Act covered, and the employees in them. It reached factories, mines, plantations, shops and other establishments within a size threshold. An employer that was covered had to pay, to insure or to fund against the liability, and the controlling authority could recover an unpaid amount as arrears of land revenue.

What moved out of it

The subject has moved into the Code on Social Security, 2020, where gratuity is dealt with for all establishments covered by the Code and with a different qualifying rule for a fixed-term employee. The Code's central rules, the Social Security (Central) Rules, 2026, were notified on 8 May 2026. An employee whose service ended before the Code, and whose claim was already in dispute, remains within the older Act to the extent the savings provision keeps it there.

What has changed, and when

The Act was passed in 1972 and amended over the years, notably to raise the cap on the amount of gratuity. From 21 November 2025 it has been displaced by the Code. The most consequential change is the qualifying period for a fixed-term employee, who under the Code becomes eligible after one year of service instead of five.

What turns on it in practice

The site's note on what the labour codes cost, and who carries it, treats the change as a balance sheet question. A company that moved deliberately to fixed-term contracts, many did so to avoid accruing gratuity, finds that the liability the structure was designed to avoid now attaches at one year. The note works an example: a technology services company with 300 fixed-term engineers at an average monthly wage of INR 80,000 owes 15/26 of 80,000, or INR 46,154, per engineer per year, which is roughly INR 1.38 crore for the cohort for a single year of service. That liability was zero under the five-year rule if the cohort turned over within five years.

The old Act therefore matters in two situations. The first is the employee whose service ended before 21 November 2025, whose entitlement is measured by the older rule of five years. The second is the contract, policy or settlement written by reference to the 1972 Act, which must be read to see whether it adopted the statutory rule as it stood or as it might change. A policy that promises gratuity as under the Act may now pick up the Code's more generous rule for fixed-term staff.

The employment practice area advises on the provisioning, on the construction of older policies, and on the dates. Finance should confirm that it is not still provisioning on a five-year assumption, since an auditor is entitled to ask.