Know About Your Right to Gratuity: Applicability, Eligibility, Calculation, and Payment
| Section Number | Section Title | Description |
|---|---|---|
| # | Introduction | Overview of the importance of understanding gratuity and its governing laws |
| 1 | Understanding Gratuity | Definition and significance of gratuity for employees |
| 2 | Applicability of Gratuity – Factories – Mines – Oilfields – Plantations – Ports – Railway companies – Shops or establishments with ten or more employees |
Outline of the applicability of the Payment of Gratuity Act, 1972 to various Establishments Applicability conditions and exceptions |
| 3 | Eligibility Criteria – Five years of continuous service – Exceptions to the five-year rule |
Criteria for employees to become eligible for gratuity Main eligibility requirement Cases of death or disablement |
| 4 | Calculation of Gratuity – For Employees Covered Under the Act – For Employees Not Covered Under the Act |
Methods for calculating gratuity based on employment status Formula and example calculations Formula and example calculations |
| 5 | Tax Implications on Gratuity – Government Employees – Non-Government Employees Covered Under the Act – Non-Government Employees Not Covered Under the Act |
Explanation of tax exemptions and conditions for different employee categories Tax exemptions Tax exemptions Tax exemptions |
| 6 | Conditions for Forfeiture of Gratuity – Offense involving moral turpitude – Riotous or disorderly conduct – Act of violence |
Scenarios where gratuity can be forfeited |
| 7 | Payment of Gratuity | Timeline and conditions for the payment of gratuity |
| 8 | Steps to Claim Gratuity – Step 1: Application – Step 2: Verification – Step 3: Payment |
Detailed steps for employees to claim gratuity Process for submitting a gratuity claim Employer’s verification process Timeline for disbursement of gratuity |
| 9 | Practical Scenarios and Calculation Examples – Scenario 1: Employee in a Large Organization – Scenario 2: Employee in a Small Shop – Scenario 3: Death of an Employee – Scenario 4: Employee Terminated for Misconduct |
Real-world examples of gratuity calculations Calculation example Calculation example Calculation example Explanation of forfeiture |
| 10 | Common FAQs on Gratuity – FAQ 1: Can an employee receive gratuity if they switch jobs before completing five years? – FAQ 2: Is gratuity part of CTC? – FAQ 3: How does one claim gratuity after resignation? – FAQ 4: Can gratuity be denied? |
Frequently asked questions and answers regarding gratuity Explanation of conditions for gratuity entitlement Explanation of gratuity in CTC Steps to claim gratuity post-resignation Conditions under which gratuity can be denied |
| 11 | Recent Updates and Future Trends – Increased Awareness and Education – Technological Integration – Legal Reforms and Updates |
Trends and updates in gratuity regulations Trend towards greater awareness and literacy on gratuity rights Use of technology for managing gratuity calculations and payments Ongoing and potential legal reforms affecting gratuity |
#Introduction
Gratuity is a vital component of an employee’s financial benefits, ensuring a lump-sum payment as a token of gratitude from the employer for the services rendered over the years. The Payment of Gratuity Act, 1972, governs this benefit, outlining the rules and regulations regarding its applicability, eligibility, calculation, and payment. This guide provides a comprehensive overview of these aspects.
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1. Understanding Gratuity
Gratuity is a statutory benefit paid to employees who have rendered continuous service for at least five years. It serves as a financial reward for long-term service, although certain conditions like retirement, resignation, or death of the employee can trigger gratuity payment even if the service duration is less than five years.
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2. Applicability of Gratuity
The Payment of Gratuity Act, 1972, applies to:
- 2.1 Factories
- 2.2 Mines
- 2.3 Oilfields
- 2.4 Plantations
- 2.5 Ports
- 2.6 Railway companies
- 2.7 Shops or establishments with ten or more employees
Once an organization falls under the scope of this act, it remains covered even if the number of employees drops below ten.
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3. Eligibility Criteria
An employee becomes eligible for gratuity if:
- 3.1 They have completed five years of continuous service with the same employer.
- 3.2 Exceptions to the five-year rule include cases of death or disablement due to an accident or disease.
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4. Calculation of Gratuity
Gratuity is calculated based on the employee’s last drawn salary and the number of years of service. The formula varies slightly based on whether the employee is covered under the Payment of Gratuity Act.
4.1 For Employees Covered Under the Act:
Gratuity = (15 x Last Drawn Salary x Number of Completed Years of Service) / 26
Last Drawn Salary includes basic pay plus dearness allowance (DA).
Completed Years of Service includes any year where the employee has worked for more than six months.
4.2 For Employees Not Covered Under the Act:
Gratuity = (15 x Average Salary of Last 10 Months x Number of Completed Years of Service) / 30
Average Salary includes basic pay, DA, and commission.
Completed Years of Service only considers fully completed years.
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5. Tax Implications on Gratuity
Gratuity is subject to income tax, with certain exemptions based on the employee’s category and the amount received.
5.1 Government Employees: Entire gratuity amount is exempt from tax.
5.2 Non-Government Employees Covered Under the Act: Least of the following is exempt:
- Actual gratuity received
- ₹20 Lakh
- (15 x Last Drawn Salary x Number of Completed Years of Service) / 26
5.3 Non-Government Employees Not Covered Under the Act: Least of the following is exempt:
- Actual gratuity received
- ₹10 Lakh
- (15 x Average Salary of Last 10 Months x Number of Completed Years of Service) / 30
Example: If Mr. C received a gratuity of ₹25 Lakh after working in two different companies, he would be taxed on ₹5 Lakh, as the cumulative tax-free limit is ₹20 Lakh.
6. Conditions for Forfeiture of Gratuity
An employer can forfeit the gratuity amount if the employee is terminated for:
- 6.1 Committing an offense involving moral turpitude.
- 6.2 Riotous or disorderly conduct or any other act of violence.
7. Payment of Gratuity
Gratuity must be paid within 30 days from the date it becomes payable (i.e., upon termination, retirement, etc.). If there is a delay, the employer is liable to pay simple interest from the due date to the actual payment date.
8. Steps to Claim Gratuity
Step 1: Application
- The employee or their nominee/legal heir must apply to the employer for the gratuity amount.
- The application should be made in the prescribed form.
Step 2: Verification
- The employer verifies the application and calculates the gratuity payable.
Step 3: Payment
- The employer disburses the gratuity amount within 30 days of the due date.
9. Practical Scenarios and Calculation Examples
Understanding gratuity through practical scenarios helps employees and employers comprehend its real-world application. Here are some examples:
- Scenario 1: Employee in a Large Organization
- Scenario 2: Employee in a Small Shop
- Scenario 3: Death of an Employee
- Scenario 4: Employee Terminated for Misconduct
Employee Details: Mr. D has worked in a multinational corporation for 15 years and 4 months. His last drawn salary, including basic pay and dearness allowance, is ₹80,000.
Calculation:
Since Mr. D has completed more than 6 months in his last year, the total years of service considered will be 16.
Gratuity = (15 x 80,000 x 16) / 26 = ₹7,38,461.54
Employee Details: Ms. E worked in a small retail shop for 8 years and 9 months with an average salary of ₹30,000.
Calculation:
As the shop is not covered under the Gratuity Act, the calculation is based on fully completed years.
Gratuity = (15 x 30,000 x 8) / 30 = ₹1,20,000
Employee Details: Mr. F worked for 6 years before his unfortunate demise. His basic pay was ₹50,000.
Calculation:
Gratuity payment depends on the number of years of service.
For 6 years, as per the table provided by the Gratuity Act: 12 x basic pay.
Gratuity = 12 x 50,000 = ₹6,00,000
Employee Details: Mr. G was terminated for gross misconduct after 10 years of service with a last drawn salary of ₹60,000.
Forfeiture:
Since the termination was due to misconduct, Mr. G is not eligible for gratuity as per the provisions of the Gratuity Act.
10. Common FAQs on Gratuity
- FAQ 1: Can an employee receive gratuity if they switch jobs before completing five years?
- FAQ 2: Is gratuity part of CTC?
- FAQ 3: How does one claim gratuity after resignation?
- FAQ 4: Can gratuity be denied?
Answer: Typically, gratuity is not payable if an employee has not completed five years of continuous service. However, exceptions include cases of death or disablement.
Answer: Yes, gratuity is often included as part of the Cost to Company (CTC) by many employers, although it is payable only upon completion of five years of service or as per the eligibility criteria.
Answer: After resignation, an employee must submit a formal application to the employer requesting the gratuity amount. The employer must verify the details and disburse the amount within 30 days.
Answer: Gratuity can be denied if the employee is terminated for misconduct involving moral turpitude, riotous behavior, or any act of violence.
11. Recent Updates and Future Trends
11.1 Increased Awareness and Education
Trend: With the advent of digital platforms and increased financial literacy, there is greater awareness among employees about their rights to gratuity and other benefits.
Impact: Employers need to ensure compliance and transparent communication regarding gratuity policies to build trust and avoid legal disputes.
11.2 Technological Integration
Trend: Use of HR software to automate gratuity calculations and ensure accurate and timely payments.
Impact: Enhances efficiency, reduces errors, and ensures compliance with legal standards.
11.3 Legal Reforms and Updates
Trend: Ongoing reforms aim to streamline the process and potentially revise the tax exemptions and caps related to gratuity payments.
Impact: Both employers and employees must stay updated with these changes to ensure proper compliance and to take advantage of any new benefits.