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Retrospective benefits on gratuity not on the cards

By Somesh Jha
June 07, 2018 15:15 IST
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The law was amended to bring parity between public and private sector employees (including PSUs) after the gratuity limit was raised for central government on similar lines

The National Democratic Alliance (NDA) government has decided against passing the benefits under the new gratuity law, which doubles the present maximum payout, with retrospective effect.


This is owing to employers fears of a higher payout. The government received several requests from workers’ representatives belonging to public sector units (PSUs) and the private sector for doubling the limit for gratuity payout on par with central government employees.

Parliament had passed the Payment of Gratuity (Amendment) Bill, 2018, in March this year, in a bid to raise the gratuity limit to Rs 20 lakh from the Rs 10 lakh earlier.

The law became applicable on March 29, through an official notification.

“On earlier occasions also, the enhancement in gratuity ceiling under the Payment of Gratuity Act, 1972, had been implemented with prospective date only. Further, implementation of the same with retrospective effect will be administratively difficult and employers may not have sufficient liquidity to meet the arrear liabilities,” an official note, prepared by the labour and employment ministry, said.

The law was amended to bring parity between public and private sector employees (including PSUs) after the gratuity limit was raised for central government on similar lines, as a part of the Seventh Pay Commission recommendations accepted by the Centre in July 2016.

The benefits for the central government employees became effective from 1 June 2016. In case of private and PSU employees, the government had notified the higher gratuity limit with effect from March 29, 2018.

The labour and employment ministry received “a large number of representations” from trade unions, individuals and organisations - through the social media and its public grievances portal - calling from making the gratuity law effective from June 1, 2016, as was done in the case of central government employees.

However, as noted by the labour ministry, the retrospective benefit arising out of the new gratuity law would have made companies bear the additional burden.

Private sector and PSUs already saw an increase in liability for its employees in the previous financial year due to the increase in gratuity ceiling.

For instance, as per a Business Standard analysis, 13 public sector banks reported an additional liability of around Rs 5,900 crore and for all 21 PSBs, the liability could touch Rs 10,000 crore, according to their audited financial results for 2017-18.

Concerned by its impact on the balance sheet of banks, the Reserve Bank of India had in April given a special dispensation, allowing PSBs to spread the liability for additional gratuity payment in four quarters.

At present, employees who complete five years of continuous service are eligible to receive gratuity when they leave the organisation.

Before this, the gratuity ceiling was revised from Rs 350,000 to Rs 10 lakh in 2010 after the Sixth Pay Commission recommendation had raised the limit for central government employees.

Gratuity is computed at 15 days salary for each completed year of service.

This move is quite unlike the stance taken by the government in passing on higher bonus benefits to the working class under a 2015 law that was made applicable retrospectively from April 2014 - drawing the ire of employers who had challenged it in various high courts.

The Payments of Bonus Act of 2015, passed by Parliament in December 2015 and notified on January 1, had doubled the statutory bonus paid to employees and made more workers eligible for bonus by raising the salary ceiling under the law from Rs 10,000 a month to Rs 21,000 a month.

The Bill was supposed to be effective from April 1, 2015.

The then labour minister, Bandaru Dattatreya, had said that it was made applicable from April 2014, following intervention by Prime Minister Narendra Modi.

The employers’ organisation had challenged the retrospective bonus law in various courts and at least eight high courts stayed the payment of such benefits.

Photograph: Reuters

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Somesh Jha in New Delhi
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