Payment of Gratuity Rules 1972
Gratuity refers to an amount of money which an employer pays to his employee in return for services offered by him to the company. However, only those employees who have been employed in the company for five years or more than five years are given gratuity. You may perceive gratuity like gratitude expressed by the company towards their employees for their services. It is governed by the Payment of Gratuity Act 1972.
In this article we shall also learn about:
Gratuity is given by the employer to his/her employee for the services rendered by him during the period of employment. It is usually paid at the time of retirement but can be paid earlier, provided certain conditions are met.
A person is eligible to receive gratuity only if he has completed minimum 5 years of service with an organisation. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to accident or disease.
There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to receive- an employer can use a formula-based approach or even pay higher than that. Gratuity payable depends on two factors: last drawn salary and years of service. To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:
a) Employees covered under the Act
b) Employees not covered under the Act
An employee will be covered under the Act if the organisation employees at least 10 persons on a single day in a preceding 12 months. And once an organisation comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees is falls below 10.
In order to receive gratuity, you need to fit the following eligibility criteria:
1. You should be eligible for superannuation
2. You should have retired from the job
3. You should have resigned after remaining employed for 5 years with the company
4. In case of your death, or if you become disabled on account of sickness or accident
Gratuity is calculated based on an individual’s last drawn salary and years of service. The formula for calculation differs from the applicability of the Payment of Gratuity Act, 1972. is calculated based on an individual’s last drawn salary and years of service. The formula for calculation differs from the applicability of the Payment of Gratuity Act, 1972.
a. Gratuity calculation for employees covered under the act
As mentioned before, organizations with 10 employees in a single day in the preceding 12 months are covered under this act.
For calculation of gratuity of employees in such organizations, the formula is –
Gratuity = (15 x last drawn salary x number of completed years of service) / 26
Here,
- The last drawn salary includes basic and dearness allowance (DA). Any other component of income will not be included in the salary.
- Completed years of service include any year where an employee has served for more than 6 months.
For instance, if Mr. B works for an organisation for 12 years and 8 months, his completed years of service will be taken as 13 years as per the gratuity rules. However, if he had worked for 12 years and 3 months, it would be considered as 12 years.
Now, let us assume that Mr. B’s last drawn salary was Rs.77,000. If he worked for 13 years, his gratuity will be –
(15 x 77,000 x 13) / 26 = Rs.5,77,500.
b. Gratuity calculation for employees not covered under the act
For calculation of gratuity of employees not covered under the act, the formula is –
(15 x average salary for the last 10 months x number of years employed) x 30
Here,
- Salary includes basic, DA, and commissions. Any other component of salary is not to be included.
- The number of years employed is only considered based on the completion of each year of service.
For instance, if Mr. C has been employed at an organisation for 15 years and 8 months, his number of years employed will be considered as 15 years.
Now, let’s assume that Mr. C’s average salary for the last 10 months was Rs.92,350. Then, his gratuity will be –
(15 x 92,350 x 15) /30 = Rs.6,92,625.
| Organisation Type | Gratuity Tax Implications |
|---|---|
| Covered Under The Act | Not applicable up to least of the following:
|
| Not Covered Under The Act | Not applicable up to least of the following:
|
| Central/state government, defence, and local government authorities | Not Applicable |
Every employer is bound to give a gratuity amount to its employees if it employs more than 10 people. But you would get the gratuity only after completing at least 5 years in the service. There are other rules of gratuity. Let us understand them one by one.
1. 5 Years of Continuous Service
You will get the gratuity only after the completion of 5 years in the service. Also, there should not be any break in the service. It must be continuous.
Note, the condition of 5 years service has a small relaxation. In the last year, mere service of 240 days would be considered as one year. Hence, You would be eligible for the gratuity after 4 years and 240 days of continuous service.
If are working in an organisation which works for 5 days in a week or less, mere 190 days would be counted as last one year. Therefore, in such case, you would be eligible for the gratuity after 4 years and 190 days.
Continuous service means uninterrupted service. But, it does include the interruption due to, leave, sickness or accident. The strike, lay-off, or a lockout is also not considered as an interruption. Indeed, any interruption which is not due to the fault of the employee, would not be counted. But, if you have taken a sabbatical or leave without pay, then your service would get interrupted.
2. Gratuity Only After Leaving Job
An employee is entitled to get gratuity only after the termination of the employment. This termination may be of retirement, resignation or job switch. So, It is clear, you are not going to get gratuity while in the job.
3. Death or Disablement Relaxation
The minimum 5-year service rule is not applicable in case of death or disablement. The gratuity amount would be given to the nominee or legal heirs.
4. Upper Limit of Gratuity
The government fixes an upper limit for the gratuity. An employer is not bound to give gratuity beyond this limit. Also, the Tax exemption would not be available for the amount over and above this limit. As of now, the gratuity limit is ₹20 lakhs.
5. Gratuity is Non-Taxable
Gratuity amount is totally tax-free. However, it should be given according to the prescribed gratuity formula. Any amount above this formula would be subject to the tax.
6. Employer Can give Excess Gratuity
An employer can give gratuity more than the prescribed formula. But the excess gratuity would be added to your taxable income.
7. Gratuity Limit
The gratuity amount is free from tax but this is subject to a maximum limit. If you get gratuity more than the limit, the excess amount would be taxable. The Government has recently increased the gratuity limit to 20 lakhs. Earlier it was 10 lakhs.
8. Gratuity Rules Applicable If Employees Are More Than 10
Every factory or establishment would pay gratuity to its employees. The gratuity rules are not mandatory for the factory or establishment which employs less than 10 persons. The number of employees would be counted as the average of the last 12 months.
9. Protected Against Liabilities
No court can attach the gratuity amount. Whether there is a decree against the employee from a civil or criminal court.
10. Forfeiture Of Gratuity If There is a Damage
An employer can forfeit gratuity if an employee makes a loss to the company. The forfeiture would be to compensate for the loss. However, the employer must terminate the services of the employee because of this damage.
Forfeiture of Gratuity
If an employee’s services are terminated due to any act, wilful omission or negligence causing damage or loss to or destruction of property of the employer, the employee’s gratuity shall be forfeited to the extent of damage or loss.
No court decree or court order can attach the amount payable under the Gratuity Act. This means that your gratuity will be still payable to you even if your employer goes bankrupt. No court order can stay this.
Calculation of Gratuity in Case of Death of an Employee
Calculation of Gratuity in Case of Death of an Employee
In case of the death of an employee, the gratuity benefits are calculated based on the tenure of service of the employee. The amount is, however, subject to a maximum of Rs.20 lakh. The following table shows the rates at which the gratuity will be payable in case of death of an employee:
| Tenure of service | Amount payable towards gratuity |
|---|---|
| Less than a year | 2 * basis salary |
| 1 year or more but less than 5 years | 6 * basic salary |
| 5 years or more but less than 11 years | 12 * basic salary |
| 11 years or more but less than 20 years | 20 * basic salary |
| 20 years or more | Half of the basic salary for each completed six-monthly period. However, it is subject to a maximum of 33 times of the basic salary. |
Latest Advancements in Regard to Gratuity
One of the most important advancements in regard to gratuity for private-sector employees is the fact that the ceiling has been raised to Rs.20 lakh from Rs.10 lakh for tax-free gratuity. The same was done for central government employees right after the announcement and implementation of the 7th Central Pay Commission.
In light of the recent pandemic and virus outbreak across the nation, the Union Government has also proposed many security measures for the workforce. In one of the recent press conferences held by the Finance Minister Nirmala Sitharaman has announced that the government plans to offer the payment of gratuity after the completion of one year of service. This will apply to the fixed-term employees of a firm.
Few Significant Points About Gratuity
Few Significant Points About Gratuity
Following are some of the most prominent points about payment of gratuity by an employer to an employee.
- An employee can receive a gratuity amount higher than Rs.10 lakh from his/her employer, the exemption for tax in this case will be calculated as per the points listed above under taxation.
- In the recent Interim Budget of 2019, interim finance minister, Mr. Piyush Goyal announced that the existing tax-free gratuity limit will be increased to Rs.30 lakh.
- The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.
- In case of the death of the employee, the nominee or heir of the employee is paid the gratuity amount. The taxation for this is calculated for the receiver under the head – income from other sources.
List of forms used for Gratuity
Form I-Application for the payment of Gratuity
Form J-Application for the payment of Gratuity by NOMINEE
Form K-Application for the payment of Gratuity by LEGAL HEIRS.
Form F-Nomination Form
Form G-To make a fresh nomination
Form H-Modification of the nominee
Form L-Issued by the employer to the employee stating amount and date of payment.
Form M-Issued by employer stating reasons for rejection.
Hope this much information is sufficient to understand the “Gratuity – New Limit, Eligibility, Formula, Taxation and Calculator”. Let me know if you have any doubts.
Q. I resigned from my job after working for 4.5 years. Would I be eligible to receive gratuity?
A) No. You need to complete at least 5 years of service to be eligible for payment of gratuity. However, according to a ruling of Madras High Court, an employee is eligible for gratuity in case he completes 240 days of service in the fifth year of service In yet another case, if the employee dies during his employment, his legal heir will be eligible for gratuity even if he did not complete 5 years of service
Q. If an individual is a contract employee, will he receive gratuity upon completing 5 years in service?
A) If the individual is on the rolls of the company rolls, he will be regarded as an employee. He will be eligible to receive gratuity. But, if he works under a contractor who is not part of the company, then contractor will be responsible to provide the gratuity and not the company
Q. Is there any upper limit on the amount of gratuity that will be received?
A) Yes. The amount of gratuity paid by a company cannot exceed more than Rs. 10 lakh, irrespective of the number of years of service of the employment.
Q. How much time does the employer take to release the amount of gratuity?
A) Ideally, as per the government mandate, the employer should remit the gratuity within 30 days from the date of full and final settlement of the employee. In case of any delay in payment, the employer is liable to pay a simple interest on the gratuity from the due date until the date when payment is made.
