gratuity act

 This article is written by Dhruv Dikshit,  a student of LC-II, Delhi University

WHAT IS GRATUITY?

Gratuity is one of the most misunderstood and misconstrued components of a person’s salary. In simple terms, it is a retirement benefit paid as gratitude to the employees who have rendered a continuous service for at least five years to incentivize them so that they continue working efficiently. It is an amount paid to an employee based on the duration of his total service but an employee becomes eligible only after he has completed 5 years of his service. Gratuity is paid to an employee when he either retires or his employment is terminated or he resigns or upon his death. Gratuity is given the force of law by the Payment of Gratuity Act 1972, which is further administered and enforced by the Central Government and the designated establishments under its control.

APPLICABILTY OF THE GRATUITY ACT

The Payment of Gratuity Act, 1972 is applicable to every factory, mine, oilfield, plantation, port and railway company; every shop or establishment within the meaning of any law in which ten or more persons are employed, or were employed, on any day of the preceding twelve months; such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf. Once the Act becomes applicable to an organization i.e. once an establishment hires more than 10 employees, the Act would continue to apply to the same even after the number of employees gets reduced below the minimum requirement. The Act extends to the whole of India excluding the State of Jammu and Kashmir.

ELIGIBILITY FOR GRATUITY

An employee who has rendered at least five years of service becomes entitled to the said benefit. The pre-requisite of completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement to the extent that the person is literally unable to provide the required services. In the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.

HOW DOES IT WORK?

An employer may offer gratuity out of the establishment’s funds or may approach an insurance company in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund.

MEANING OF CONTINUOUS SERVICE

According to the Act, gratuity shall be payable to an employee on the termination of his employment after he has provided continuous service for not less than five years. The question that arises is, what is the meaning of “continuous service”? An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

CALCULATION OF AMOUNT OF GRATUITY

GRATUITY = LAST DRAWN SALARY × 15/26 × NO. OF YEARS OF SERVICE

The ratio 15/26 represents 15 days out of the 26 working days in a month

Last drawn salary = Basic Salary + Dearness Allowance

Years of Service are rounded down to the nearest full year.

For example, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

  1. In the case of a piece-rated employee or a person who works on commission, daily wages shall be computed.
  2. For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.

PAYMENT OF GRATUITY

The employer shall arrange to pay the amount of gratuity within 30 days from the date it becomes active i.e. from the day the person retires or his employment is terminated, to the person to whom the gratuity is awarded. If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate in coherence with the guidelines laid down by the by the Central Government. Gratuity can be paid in cash, demand draft or bank cheque to the employee via his preferred mode of payment.

FORFEITURE OF GRATUITY

The employer can withhold or forfeit gratuity wholly or partially even if employee has completed 5 years if the employment of the said employee has been terminated for disorderly conduct or any other misdemeanour or an act tantamount to violence provided that such offense is committed by him in the course of his employment. It may be noted that above act should have been committed by employee during his employment.

EXEMPTION FROM TAX

Taxability of gratuity depends on the recipient’s job. In case of government employees there is no tax on the gratuity. In case of private sector employees, the gratuity is exempt from tax subject to a maximum of Rs 10 lakhs or 15 days salary for each completed year of service

If a person has received gratuity before and if any exemption was allowed for the same, then the exemption to be allowed during the retirement year gets reduced to the extent of exemption already allowed, subject to the overall limit of Rs 10 lakhs.

TIME LIMIT FOR MAKING PAYMENT OF GRATUITY AMOUNT

  1. A person can himself, or via his authorized person send an application to the employer for payment of the desired gratuity.
  2. As soon as gratuity becomes payable, it is calculated by the employer. Furthermore, the employer gives a notice in writing to the eligible person and also to the controlling authority specifying the amount determined.
  3. The employer must pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.

FAILURE TO PAY GRATUITY AMOUNT

Payment of gratuity is a statutory requirement. In case an employer fails to pay gratuity amount to an employee, he shall be liable for punishment. Where the employer fails to make payment of any gratuity payable to the employee, he shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to two years. Any employer who contravenes or makes default in complying with any of the provisions of the Act or any rule or order made there under shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both. If an employer makes any false statement or false representation in order to avoid any payment to be made by himself under the Act or of enabling any other person to avoid such payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both.

PROTECTION OF GRATUITY

The gratuity amount payable shall not be twisted in a serpentine manner in execution of any decree or order of any civil, revenue or criminal court.

REMEDY IN CASE THE EMPLOYER DOES NOT PAY GRATUITY

If the amount of gratuity is not paid by the employer within the prescribed time to the said person, he/she has the right to file a complaint to the Controlling Authority under the Payment of Gratuity Act within the area where the employer’s establishment is situated or where the employee was working at the time of termination. Moreover, the aggrieved person can also approach Labour Courts to get relief and justice.

DIFFERENCE BETWEEN GRATUITY AND SEVERANCE

Severance is paid when an employee is declared redundant. Gratuity is a lump sum amount that an employer pays an employee if he/she retires or resigns from employment. An employee does not contribute any portion of her salary towards this amount. Gratuity is only paid out at the time of retirement or resignation, and in the event of death or being rendered disabled because of an accident or illness. On the other hand, severance is offered to an employee upon being laid off from a company. The receipt of a severance package is contingent upon signing a severance agreement.

BIBLIOGRAPHY

  1. Payment of Gratuity and eligibility; http://www.helplinelaw.com/employment-criminal-and-labour/ECGI/eligibilty-for-claiming-gratuity-in-india.html
  1. Income tax exemption on Gratuity; http://blog.cleartax.in/income-tax-exemption-gratuity/
  1. No tax on gratuity of up to Rs 10 lakh; http://www.business-standard.com/article/pf/no-tax-on-gratuity-of-up-to-rs-10-lakh-114112200779_1.html
  1. You can either get gratuity or service pay; http://www.standardmedia.co.ke/article/1143998587/you-can-either-get-gratuity-or-service-pay
  1. Severance Package; http://www.investopedia.com/terms/s/severence-package.asp
  1. The Applicability and Calculation of Gratuity in India;http://www.india-briefing.com/news/applicability-calculation-gratuity-india-6435.html/#sthash.L3zuyTTW.dpuf
  1. Payment of Gratuity Act 1972

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

26 COMMENTS

  1. Hi, My company was started in July 2010 and it got registered in Oct 2010. My PF started deducted from April 2014. I have completed 6.8 years in this company. Can you please let me know whether I am eligible for gratuity?

  2. Dear Sir

    Mohan has worked for 8 year in a company .and his basis salary was rs 25000/- and after 6 years they reduced his basic salary up to 18000/- though his gross salary remained same.

    now after 8 year mohan has resigned and smoothly given the hand over .

    on which basis salary he will get his gratuity .

  3. Hi Sir,

    I Joined in My Current Company on January-25-2012 and I am going to leave this company on 11-November-2106. So almost 4 years 9 months 15 days going to complete. So Will i eligible to take Gratuity in Current company. Please let me know

  4. Hi,

    If the employer having 10 employees on 2013(9 full time + 1 part time), 2014 it falls below 10. say like 6 employees. whether the employee eligible for gratuity if he has 5 years? What is the preceding 12 months? 2015 and 2016 average employee are 5-6.

    Regards,
    Nandhu

  5. Sir,
    I have worked for five years in C&F i.e. 01 Dec 2009 to 25 Jan 2015 for multinational company and i have left the job on feb 2015. They have deducted the PF & ESIC, but I have not applied for the gratuity till now. What is the procedure to apply the gratuity now.
    Regards
    Shekar

  6. Hi Sir , I want to know if i’m eligible for gratuity or not .

    I worked in an organization for 7 years and 2 months . Now let let you the situation .

    I joined organization (X) in April 2009 . In the year 2012 ( sep month) , i went to US from the same company on L1 visa for project work. In US this company is registered with different name (Y) . Although the management is same ( In India and US). My salary was stopped in India and i was in US on their payroll .

    In the year 2013( sep month) , i again joined my company (X) after completing the project work . I was assigned a new emp ID here when i came back . I resigned from my company in 2016 (june month) . Earlier my HR told that i will get my gratuity but now they say that i’m not eligible .

    Please , suggest me . If you can help me , i will be very thankful to you .
    Or if you want me to call you then please provide me your number . I can explain better .
    My number is 9975805177.

  7. Hi gratuity can be a part of CTC but not the part of Gross monthly salary. is it ?

    One of my friend’s employer added gratuity on his gross monthly salary, so is this OK or do he need to take any action?

    He is joined the company around 10-11 months only. they changed the salary structure and added gratuity on monthly salary.

  8. Hi Sir,

    I have completed 4 years and 200 days in my current employment will i be eligible for Gratuity…

    Thanks
    Vineet

  9. Dear sir I am Mitesh Himpalnerkar working in private finance limited company I have completed 4 years 11 months service I want to switch this job so it applicable for graduaty please guide to me

  10. as per 7th pay commission, increase in gratuity from Rs. 10 lacs to Rs. 20 lacs has been approved by Cabinet on 29.06.2016. as per pay commission this is expected from 1st January 2016. would it be so? whether this requires a notification and can the act be amended retrospectively from 01.01.2016? is it applicable only to Central Government Employees or to all workers all over India? please clarify & reply immediately

  11. Hello,
    Sir i am working in public sector bank. I have joined after 01.04.2010 so i am covered under DCPS (Defined contributory pension system OR new pension scheme). Whether i am eligible for gratuity.

  12. Hi I am Vaibhav Jadhav.
    I was on probation period from 1 August 2011 to 1 Nov 2011 and then confirmed on service.
    Now i have resigned and 20 June 2016 will be my last working day.
    So its about 51 days short of 5 years.
    Will I be eligible for gratuity?

  13. Does the Payment of Gratuity Act of 1972 portion 2fEPF apply to every state in the United States of America
    And also do you know the law regarding a husband abandoning his wife who was a United States veteran and she did not receive spousal support from him and the Veterans Administration disallowed a claim that I was entitled to.

  14. Hi,

    I joined IT company on 24th August 2010 and left it on 12th August 2015 i.e. 12 days short to 5 years. Am I eligible for gratuity?

    • Hi Shub,

      If you complete 4 years and 240 days with an employer, then you will eligible for Gratuity.

      Hope this will clarify your doubt.

      Muru

  15. Thank you for this article,
    I am having 5.8 years experience in one company. if I leave this company then first 1 year is GET period, company shows gratuity in that period also. but while leaving says you need to complete 6 years. can anyone tell me GET period is has to included or excluded for 5 years calculation?

  16. Hi Dhruv,

    Your article is good. I have a question under “TIME LIMIT FOR MAKING PAYMENT OF GRATUITY AMOUNT”. I know your points are based on S. 7(1) and 7(2), but what if the employee or the nominee or the heir did not file the application as in (1). It could happen in many cases. For example, the employee died. He did not specify a nominee or the nominee/heir is/are not aware of their eligibility to the gratuity and did not file an application. S. 7(2) says irrespective of whether an application u/s 7(1) is received or not….. the employer has to give notice to the person eligible and controlling authority….”
    1. What if the employer did not send such a notice?
    2. In case no nominee/legal heir appeared what the employer has to do with the money?
    3. Can the employer keep the money or the employer has to deposit it with the controlling authority?
    4. If the employer can keep it, for how long? Then what happens to that money?
    5. If the heirs claim it at a later stage, say after 5 years when they come to know about the eligibility, can they claim it at that time? Are they eligible for any interest?

    Thanks
    John

  17. Hi Dhruv,

    Your article is good. I have a question under “TIME LIMIT FOR MAKING PAYMENT OF GRATUITY AMOUNT”. I know your points are based on S. 7(1) and 7(2), but what if the employee or the nominee or the heir did not file the application as in (1). It could happen in many cases. For example, the employee died. He did not specify a nominee or the nominee/heir is/are not aware of their eligibility to the gratuity and did not file an application. S. 7(2) says irrespective of whether an application u/s 7(1) is received or not….. the employer has to give notice to the person eligible and controlling authority….”
    1. What if the employer did not send such a notice?
    2. In case no nominee/legal heir appeared what the employer has to do with the money?
    3. Can the employer keep the money or the employer has to deposit it with the controlling authority?
    4. If the employer can keep it, for how long? Then what happens to that money?
    5. If the heirs claim it at a later stage, say after 5 years when they come to know about the eligibility, can they claim it at that time? Are they eligible for any interest?

    Thanks
    John

LEAVE A REPLY