Payment of Gratuity Act, 1972

Gratuity is the part of the salary that is received by the employee for the services rendered by the employees in an organization. It is a retirement benefit plan offered by employers payable to the employee upon leaving the job.

Applicability

Applicable to all companies including shops, establishment, factories across India

Must have at least 10 employees in the last 12 months to be applicable

Once a company falls under the act the applicability of 10 employees becomes irrelevant

Wages

All emoluments earned by employee while on duty or on leave including dearness allowance. Bonus, incentives, HRA, overtime wages and other allowances are not considered as wages for the purpose of Gratuity computation

Continuous Service

From the date of joining till the last working day unless interrupted by Employee’s willful exit from the employment shall be considered the tenure for the purpose of Gratuity Computation. Interruptions like Leaves, strike, lay-off, lock-out, cessation of work not due to any fault of employee shall not be deducted from the tenure.

Payment of Gratuity

If the employee has completed at least 5 years of continuous service then gratuity will be due at the time:

• Superannuation
• Retirement
• Resignation
• Death due to accident or illness (minimum 5 years of continuous service is not applicable in case of termination due to death or disablement)

Payment Amount

For every completed year or part thereof in excess of six months the employer shall be gratuity at the rate of 15 days of last earned wages. Formula for the calculation is:

Last drawn salary * 15/26 * No. of continuous years of service.

For Example: If an employee has worked for 8 years and 8 months, then 9 years of Gratuity will be paid. If an employee has worked for 8 years and 5 months, then 8 years of Gratuity will be paid.

Maximum Limit is capped to 10 Lakhs and 20 Lakhs for government employees (as per the 7^th CPC w.e.f 1^st Jan 2016). This is the total for an employee across all employments.

Nomination

Employee can submit Form F at the time of joining to nominate members of family to receive gratuity in the event of death of employee

Refusal to Pay

Employer cannot refuse to pay the gratuity unless the termination is due to disorderly act or an act of violence. Employers can deduct cost of damages (if any) from the final gratuity amount.

Tax Implications

Gratuity is a retirement benefit and hence is exempted from Tax. For Government employees the entire amount is exempted from the tax. For non-government employee, the exemption shall be minimum of the three below:

• Statutory limit of Rs 10 lakh
• Last drawn salary * 15/26 * No. of continuous years of service
• Actual Gratuity amount paid to the Employee.

Compliance Requirements:

• Submit notice in Form A within thirty days of opening and rules becoming applicable on the establishment to the Controlling Authority
• Verify the particulars of employee given in form F of nomination with reference to the records of the establishment and return to the employee within thirty days or receipt
• Retain a copy of the form F and return the duplicate to the employee after obtaining a receipt and attesting on the copy returned to the employee

Courtesy

Editor,

CompliFacts – The Compliance Knowledge Base

CompliCheck Systems

 

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