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Amendments to the Gratuity law relax gratuity limits

By: Laxmi Joshi

The Payment of Gratuity (Amendment) Bill, 2017 (the “Bill”) approved by the Lok Sabha (Lower House of Parliament) earlier this month was passed by the Rajya Sabha (Upper House of Parliament) last week, paving the way for further amendments to The Payment of Gratuity Act, 1972 (the “Act”).

The Act is one of the key labour welfare legislations of India and stipulates payment of gratuity by employers to employees on termination of employment or death, with the eligibility criteria being 5 years of minimum service with the employer. The amount of gratuity is calculated based on the last drawn salary of the last 15 days for each year of continuous and complete service, subject to a cap and is tax-free.

With the passage of the Bill, the following provisions of the Act will be revised:

  1. The present ceiling of INR 10 Lakhs on the gratuity payable to an employee under Section 4 will stand replaced with “such an amount as may be notified by the central government from time”. Currently, the maximum gratuity payable to an employee is INR 10 Lakhs and the government proposes to increase it to INR 20 Lakhs. This is essentially to bring the Act on par with the Central Civil Services (Pension) Rules, 1972 where the upper limit on the gratuity for central government employees was enhanced from INR 10 Lakhs to INR 20 Lakhs following the 7th Central Pay Commission’s recommendation.

  2. 12 weeks prescribed as the maximum maternity leave period for the purpose of calculating continuous service of a female employee under Section 2A will be changed to “such period as may be notified by the central government from time to time”. The period of 12 weeks was based on the period of maximum maternity leave allowed under the Maternity Benefit Act, 1961. The Maternity Benefit Act, 1961 has since been amended to increase the maximum maternity leave from 12 weeks to 26 weeks by the Maternity Benefit (Amendment) Act, 2017. Therefore, with this amendment the government will be able to revise the maximum maternity leave period for calculation of a female employee’s continuous services to 26 weeks and bring it in tandem with the current maternity leave regime in India.

The present amendment is a welcome change as it will largely benefit the private sector employees covered by the Act. The current amendment also allows the government to make further changes in the gratuity ceiling and the maximum maternity period as may be required from time to time simply by way of notification, without having to amend the law. While this employee-friendly amendment will no doubt increase the employers’ burden in the long term, it remains to be seen how employers (re)evaluate the existing severance payment structures. This may also further the cause of the gig-economy worker in the age of tech disruption. The Bill will be enacted with the approval of the President of India and published in the official gazette. Thereafter, the changes will come into effect on being notified by the government.


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