Gratuity: amount, nomination, compulsory insurance and the competent authority

1. Determination of the amount: section 53(2) to (5) [PG Act s.4(2) to (5)]

• Rate. For every completed year of service, or part of a year in excess of six months, fifteen days' wages (or the number of days notified by the Central Government) at the rate of wages last drawn (s.53(2)). “Wages” is the common definition in s.2(88): basic pay, dearness allowance and retaining allowance, with the 50 per cent add-back rule.
• Monthly-rated employees. Fifteen days' wages = monthly rate ÷ 26 × 15 (Explanation 3). The divisor is 26, not 30, because a month has about 26 working days. The Court adopted this reading under the 1972 Act in Digvijay Woollen Mills Ltd. v. Mahendra Prataprai Buch, 1980 INSC 132, (1980) 4 SCC 106, and Jeewanlal (1929) Ltd. v. Appellate Authority, 1984 INSC 163, (1984) 4 SCC 356; Parliament later wrote it into the Act, and the Code keeps it.
• Piece-rated employees. Daily wages are the average of total wages for the three months before termination, excluding overtime (first proviso).
• Seasonal establishments. Seven days' wages for each season (second proviso).
• Fixed term and deceased employees. Pro rata (third proviso).
• Ceiling. The amount shall not exceed the amount notified by the Central Government (s.53(3)). Under the 1972 Act the ceiling was raised to Rs 20 lakh in 2018.
• Reduced wages after disablement. Wages before disablement are used for the earlier period, reduced wages for the later (s.53(4)).
• Better terms under an award, agreement or contract are preserved (s.53(5)); see Beed District Central Co-operative Bank Ltd. v. State of Maharashtra, 2006 INSC 682, (2006) 8 SCC 514, where the Court held that the Act lays down a floor and an employee may take the more beneficial scheme.

Worked example. An employee retires after 20 years and 7 months on a monthly wage of Rs 52,000. Completed years = 21 (the 7 months exceed six). Gratuity = 52,000 ÷ 26 × 15 × 21 = 2,000 × 15 × 21 = Rs 6,30,000, within the ceiling.

2. Nomination: section 55 [PG Act s.6]

• Every employee who has completed one year of service must make a nomination, in the prescribed form and time (s.55(1)).
• He may distribute the amount among more than one nominee (s.55(2)).
• If he has a family when he nominates, the nomination must be in favour of one or more members of the family; a nomination of an outsider is void (s.55(3)). “Family” is defined in s.2(33).
• If he has no family, he may nominate anyone; but when he later acquires a family that nomination becomes invalid and he must make a fresh one in favour of family members (s.55(4)).
• He may modify the nomination at any time by written notice to the employer (s.55(5)).
• If a nominee dies before him, that share reverts to him and he must make a fresh nomination (s.55(6)).
• Every nomination and change is sent to the employer, who keeps it in safe custody (s.55(7)).

On the employee's death the gratuity is paid to the nominee, or to the heirs if there is no nomination, and a minor's share is deposited with the competent authority for investment until majority (third proviso to s.53(1)).

3. Payment: section 56 [PG Act s.7]

• The eligible person, or someone authorised by him, applies in writing to the employer within the prescribed time (s.56(1)).
• As soon as gratuity becomes payable, the employer must, whether or not an application has been made, determine the amount and give written notice to the payee and to the competent authority (s.56(2)).
• He must pay within thirty days of the date it becomes payable (s.56(3)).
• If he does not, he pays simple interest from the date it became payable, at a rate not exceeding the notified rate for long-term deposits, unless the delay was the employee's fault and the competent authority permitted it in writing (s.56(4)).

4. Disputes and the competent authority: sections 56(5) to (9) and 58 [PG Act ss.3, 7]

Appointment (s.58) [s.3, “controlling authority”]: the appropriate Government appoints, by notification, any officer with the prescribed qualifications as competent authority for an area, may distribute business among several, and the authority may take the help of persons with special knowledge.

Disputes (s.56(5)): where there is a dispute about the amount, the admissibility of the claim or the person entitled, the employer must deposit the admitted amount with the competent authority. Either side may apply to the authority, which, after inquiry and hearing, determines the matter and directs payment of any balance. It pays out the deposit to the employee, or to the nominee or heir where there is no dispute about entitlement.

Powers (s.56(6), (7)): those of a civil court for attendance and examination on oath, discovery and production of documents, evidence on affidavit and commissions; the inquiry is a judicial proceeding for the perjury provisions of the Penal Code.

Appeal (s.56(8), (9)): within sixty days to the appropriate Government or the appellate authority it specifies, extendable by another sixty days for sufficient cause. An employer's appeal is admitted only on deposit of the amount due. The appellate authority may confirm, modify or reverse.

Recovery: a sum due that is not paid is recovered through the certificate and Recovery Officer procedure in sections 129 to 131 [PG Act s.8, recovery as arrears of land revenue].

5. Compulsory insurance: section 57 [PG Act s.4A]

• From a date notified by the appropriate Government, every employer, other than the Central or a State Government, must insure his liability for gratuity with an insurer regulated by IRDAI (s.57(1)).
• An employer who already has an approved gratuity fund and wishes to continue it, and every employer of 500 or more persons who sets one up, may be exempted (s.57(2)). “Approved gratuity fund” has its Income-tax meaning.
• Every employer must register his establishment with the competent authority, and can be registered only if he has the insurance or the approved fund (s.57(3)).
• If he fails to pay the premium or contribution, he must pay the gratuity due, with interest, to the competent authority forthwith (s.57(5)).

The point of the section is security: gratuity is paid at the end of service, often when the employer is in difficulty, and insurance or a separate fund protects it against the employer's insolvency.

How this is examined

“Gratuity determination” (January 2026, short note), “the nomination procedure” (February 2025), and “how is gratuity calculated” (August 2024) are the recent questions. For determination, give the formula with the 26-day divisor and a worked example, then the duty to determine and pay in thirty days and interest. For nomination, the seven sub-sections of s.55 in order, stressing that a nomination outside the family is void.