The Gratuity Act 1972 is an important legislation that has been enacted in India to provide employees with a lump sum amount of payment in the form of gratuity as a token of appreciation for his long-term service to the organization. The Gratuity Act ensures that at the time when the employee leaves an organization, if he or she fulfills specific criteria, then he or she is paid a lump sum amount. Gratuity forms an important part of employee welfare, particularly in terms of planning for retirement, hence providing greater security.
The act covers all aspects, like eligibility, liability, rules for calculation, and amendments introduced over time to accommodate changing work dynamics. We shall be covering in the following article the meaning of gratuity, who is liable to pay, features of the act, eligibility criteria, rules, and the latest amendments.
What is Gratuity?
Gratuity is a kind of financial benefit that the employer gives to the employees on the ground of the period of service rendered. Gratuity is a payment made in one sum as a token of appreciation or thanks at the time of retirement, resignation, dismissal, except under specified circumstances. Gratuity is included in the remuneration of an employee and is one of the most important sources of post-retirement earnings.
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Who is Liable to Pay Gratuity?
Under the Payment of Gratuity Act, of 1972, gratuity is payable by the employer. An organization or business house employing 10 or more workmen must apply the provisions of this act. The employers who are obliged to apply the provisions of this act include:
Organizations in the private sector: organizations that employ a minimum of 10 people.
Public sector companies that abide by the same rules of employment.
Educational institutions and non-government organizations that have more than 10 employees.
Payment of Gratuity Act 1972
The Gratuity Act, 1972, secures the interest of employees by making employers compulsory to offer gratuity to any person who provides continuous service for ten years. Employees working in factories, shops, schools, mines, and even other concerns that fall within the definition of this act are eligible for the benefits of this act.
The basic motives and aims behind the act are:
To make the employees financially sound at the time of retirement or the termination of services.
To ensure gratuity payment uniformly for all industries.
For a uniform framework of computation and eligibility.
Salient Features of Gratuity Act 1972
The Gratuity Act 1972 carries critical elements that every employee and employer should be aware of. These define the scope of the act, eligibility criteria, limits on payment, and the general framework within which gratuity is managed. This section explains the salient points of law.
Applicability: The act applies to organizations having 10 or more workers.
Continuance Service: Employees must have continuance service of five years, except in the case of death or disability.
Limit: The present gratuity limit is fixed at INR 20 lakhs.
Tax Exemption: Gratuity is not liable to pay income tax according to Section 10(10) of the Income Tax Act, subject to fulfilling certain conditions.
Payment Date: Gratuity shall be paid within 30 days from the date of cessation of employment.
Interest Recovery: Gratuity failed to be paid within a stipulated time scale. The employer is liable to pay interest on such delayed gratuity.
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Rules and Eligibility under the Gratuity Act 1972
Gratuity is not paid to everyone. The Gratuity Act specifies under which conditions gratuity becomes payable and who is eligible. This chapter explores who is eligible and whom an employer needs to pay, following the rules defined.
Eligibility criteria
An employee must fulfill the following requirements before getting a gratuity:
At least five years of continuous service.
Gratuity is payable for permanent and contractual employees.
The five-year condition is waived in the event of death or permanent disability, and gratuity is paid to the nominee or legal heir.
Gratuity Rules
Service Cessation: Gratuity becomes payable in the case of retirement, resignation, and dismissal.
Calculation of Gratuity
The gratuity formula allows a reasonable gratuity, considering both years of service as well as the last drawn salary. The following formula calculates this:
Gratuity = {(Last drawn salary × 15 × Number of years of service) ÷ 26}
Here, the last drawn salary includes both basic pay and dearness allowance.
If he or she works for more than six months of the fraction of a year, it is considered as full year. For example, 7 years and 8 months of service will be treated as 8 years.
The maximum upper limit for gratuity payment is INR 20 lakhs
Illustration
His or her last drawn salary is INR 50,000, and he or she has been working with the company for 10 years.
Gratuity = (50,000 × 15 × 10) ÷ 26 = INR 2,88,461
Most Recent Amendments to Gratuity Act
The amendments in the Payment of Gratuity Act, of 1972 prove that the nature of workplaces is changing and the inflation rate is consistently increasing. Most importantly, they comprise of:
Gratuity Amount Limits Raised: Gratuity payment limits were enhanced from INR 10 lakhs to INR 20 lakhs.
Continuous Service Further Considered on Account of Maternity Leave: Service on the account of maternity leave will also be taken under consideration as a part of continuous service.
Private Sector Alignment: Gratuity applicable rules for private sector employees are generally in line with the public sector especially post-7th Pay Commission.
Notification of Gratuity Eligibility: Gratuity eligibility must be notified to the employee, and it should always be paid within the prescribed period.
Procedure to Pay Gratuity
The procedure for claiming and paying gratuity is simple, but it can only be followed to the letter for compliance. This section details the step-by-step process for both employees and employers, including documentation, timelines, and consequences for delayed submittals.
Submission of Application: The gratuity can be claimed by either the employee or his nominee by making a written application to the employer.
Employer’s responsibility: He must act and start the payment within 30 days of receiving the application.
Interest for Delay: Gratuity is paid with applicable interest if not within 30 days.
In case of Nominee’s absence: the legal heir gets the gratuity if the employee has not nominated anybody.
Cases of Forfeiture of Gratuity
Where gratuity can be considered a right for the employees, there are situations where the employees may lose the opportunity to recover the gratuities. This section explains the situations under which the employer is at liberty to withhold the gratuity lawfully, such as for misconduct and if the employee has dealt with the organization with evil intent.
Gratuity may be forfeited by the employer on one or the following grounds:
Termination due to misconduct falling under the head of moral turpitude or other illegal acts.
Employee dismissal on the grounds of willful damage or loss to the firm's assets.
Major Provisions of Gratuity Act 1972
The Payment of Gratuity Act, of 1972 lays down some basic provisions for the gratuity of employees to achieve uniformity in all fields. The following are the important provisions that explain the act,
1. Coverage
The act is applicable to employers with 10 or more workers during any calendar year.
Once the act is applied, it remains applicable even when the employee strength reduces to below 10
2. Eligibility
Employees should render five continuous years of service so that they are gratuity-eligible
Five-year service rule is exempt if the employees die or get permanently disabled.
Part-time and contractual employees are also eligible if they satisfy the service requirement.
3. Calculation Formula
Gratuity = (Last drawn salary × 15 × Number of years of service) ÷ 26
Salary includes basic pay and dearness allowance.
Service periods of more than six months are counted as one full year.
4. Date of Payment
Gratuity must be paid within a period of thirty days from the date when the gratuity has fallen due.
Interest is compounded on the amount due at a prescribed rate with effect from the due date up to the actual date of payment.
5. Gratuity Ceiling
Under the latest amendments, the gratuity payable can be a maximum of INR 20 lakhs.
Any payment exceeding INR 20 lakhs will attract tax.
6. Exemption from Tax
Gratuity is exempt from tax under Section 10(10) of the Income Tax Act subject to the prescribed limit.
7. Forfeiture of Gratuity
In case an employee is dismissed due to one of the following reasons, gratuity can be forfeited:
Misconduct comprises moral turpitude.
Willful damage to loss caused to the property of the employer.
8. Nominations
Employees are expected to nominate a beneficiary for gratuity during their service.
In the absence of nomination, gratuity is paid to the legal heir of the employee.
9. Payment upon Death or Permanent Disablement
Gratuity is paid to the nominee or legal heir of an employee in case death or permanent disablement takes place without having completed five years of service.
10. Maternity Leave as part of Service
As per the latest amendments, maternity leave is recognized as service continuity by the employer.
11. Employer's Liability and Compliance
The employer is liable to provide notice of qualification to the employees and ensure timely payments are paid to them.
If there is a default under the act, the employers face penalties or penalty and fines.
12. Dispute Settlement
During disputes that are considered on the payment of gratuity, an aggrieved party approaches the Controlling Authority of the act.
The decision of the Controlling Authority may further be appealed to the Appellate Authority.
Conclusion
It secures the future of employees financially because the Gratuity Act 1972 directs organizations to provide gratuity to long-serving employees as appreciation for their loyalty and dedication towards the organizations. The current update with the increased gratuity cap, in addition to including maternity leave, underscores the commitment of the government to making provisions more complete and employee-friendly. The technicalities of the act are also put into place for all eligible establishments, thereby continuing the promotion of fair labor practices in India.
Gratuity Act 1972 FAQs
1. What is the Gratuity Act 1972?
The Gratuity Act 1972 is a law legislated in India to grant financial gratuity to employees as a form of appreciation for long-time service. Gratuity is an amount paid by employers on a one-time basis to eligible employees at the time of retirement, resignation, or at the time of any death/disability.
2. What is the maximum limit for gratuity payments?
According to new amendments, the maximum gratuity payment is ₹ 20 Lakhs. Gratuity payments above this limit in amount are taxable.
3. Is gratuity taxable?
Gratuity is exempt from income tax under Section 10(10) of the Income Tax Act but it is liable to some restriction of INR 20 lakhs. Gratuity received above that amount might get taxed.
4. Till when is the gratuity payable?
Gratuity should be paid within 30 days from the date it is supposed to become applicable to an employee, after the resignation, retirement, or even termination. In case it gets delayed, then the employer has to pay with some interest.
5. Can an employer forfeit gratuity?
Yes, gratuity can be forfeited when the employee has been terminated for misconduct, willful damage to property belonging to his employer, or has indulged in any illegal activity.
