The Payment of Gratuity Act, 1972 is an Indian Legislation that makes an industry pay a one-time gratuity to retired employees. It is a benefit that an employee receives for the services a company gives to its employees. It is paid at retirement but can be paid before under certain circumstances. This Social Security Act provides social benefits for employees working in industries, enterprises, and organisations.
Before 1972, no legislation made it mandatory to pay a certain amount to employees at the time of retirement. The enactment of the Payment of Gratuity Act made it compulsory to pay such an amount. It is the development of labour law in India.
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What is gratuity?
The word Gratuity gets derived from the Latin word, ‘Gratuitas’, which means Gift. In the Industrial Sector, it gets considered a gift from employer to employee. The employee receives a mandatory retirement benefit for his service to the organisation, but only after completing five years. It started as a payment plan for the industries, but now it is extended to a government organisation. In India, Gratuity gets covered by the Payment of Gratuity Act, 1972.
Payment of Gratuity Act, 1972
The payment of gratuity amount to the employee engaged in the factories, mines, oilfields etc., is provided under the Payment of Gratuity Act, 1972.
Scope and objective of the payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 was enacted to provide a gratuity, a monetary benefit given for the services rendered to the employees who work in factories, oilfields, mines, plantations, railway companies, etc. Such benefit is given under certain conditions.
All the government departments, whether central or state, come under the purview of this Act. Private organisations can also come under the purview of this act after fulfilling certain conditions.
Eligibility criteria for payment of gratuity
As per the Gratuity Act, the following are the criteria that need to be satisfied to receive gratuity:
- Eligible for superannuation.
- The employee should retire from service.
- One should resign after the continuous employment of five years with the company.
- When the employee is dead, the gratuity amount is payable to the nominee if disablement or sickness due to an accident.
How does the gratuity work?
The gratuity amount can either get paid to the employee from their account or a general gratuity insurance plan.
When the company chooses the option of the Gratuity Insurance Plan, The company pays an annual contribution of the amount to the service provider. The insurance company can pay the gratuity amount to the employee.
The amount of gratuity gets paid without the employer’s contribution.
Rules of Gratuity
- When there are 10 or more individuals in an organisation, the organisation is liable to pay gratuity: An organisation where there are 10 or more employees on a single day in the preceding 12 months. The organisation is liable to pay the amount of gratuity. If the number of employees in the organisation reduces to 10, the organisation has to pay the gratuity.
- Employees to complete 5 years in an organisation: An employee has to render service for at least 5 continuous years. This condition is not considered when the employee is deceased or disabled due to employment.
- Gratuity can be provided not only upon retirement: As per gratuity rules, an employee can be eligible to benefit from gratuity by retirement, resignation, demise, disablement due to an accident or disease, VRS, termination, Lay Off due to retrenchment.
- Gratuity can get forfeited for several reasons: As per rules of gratuity, the gratuity amount of the employee can be forfeited by the employer in the case when the employee gets terminated for the following reason:
- Committing a moral turpitude offence.
- Conduct of employees that is riotous or disorderly, or violent.
- Gratuity cannot get refused at the time of bankruptcy: An organisation is liable to pay the amount of gratuity even if the organisation declares bankruptcy.
- Gratuity up to 20 lakh gets exempted from taxation: Payment of Gratuity Act, 1972 exempts the organisation from tax for the gratuity amount of up to 20 Lakh Rupees. Before the Gratuity Rules 2020, the exemption was for the amount of 10 Lakhs Rupees.
- Gratuity gets calculated upon the last drawn salary, the employee’s last drawn salary and the number of years he worked in the organisation.
- Gratuity exempted from tax: If the employee is deceased, the gratuity paid to his widow or legal heir gets exempted from tax. Any other payment to the employee or legal heir paid for any injury caused will get exempted from the tax.
Gratuity in salary
Gratuity gets considered the financial benefit offered to an employee by an employer as recognition of his/her service in the organisation. Gratuity can get regarded as a part of the salary that an employee receives at retirement as his retirement benefit.
Section 4A of the Payment of Gratuity Act, 1972 provides Compulsory Insurance to the employer through the Life Insurance Corporation. The act only exempts the central and state government from such insurance. Also, the employers who established the Gratuity fund in their organisation get exempted from the Payment of Gratuity Act’s Section 4A.
The Government is vested with the power to make laws related to compulsory insurance whenever the government feels necessary.
Violation in the case of compulsory insurance will lead to penalties on the organisations.
Payment of Gratuity
Section 4 of the Payment of Gratuity Act, the employer is liable to pay the gratuity within 30 days from the very day the employee retires, or his employment gets terminated. In case of delay in payment of gratuity within thirty days, an employer is liable to pay such simple interest on such an amount from the date when the gratuity payment is due.
The Central Government lays down the rate of simple interest through the guidelines. The payment of Gratuity can be made by cash, cheque, demand draft to the employee or by any other mode of payment.
Calculation when an employee gets covered under Gratuity Act
The formula for calculating Gratuity is:
Gratuity = Last drawn salary * 15/26 * Number of years of service
Last drawn salary = Basic Salary + Dearness Allowance
15/16 represent: 15 days out of the 26 working days
Years of service= to the round of the full year an employee worked for the organisation.
Calculation when an employee not get covered under Gratuity Act
When an employee not get covered under the Gratuity Act, the amount of gratuity can be paid by the organisation. Such an amount to be paid is not mandatory but as per the organisation’s willingness. The formula for the calculation amount is as follows:
Gratuity amount = (15*period of service* last drawn salary)/30
Calculation of gratuity when an employee dies
When an employee dies, the amount of gratuity is calculated based on the tenure of work of the employee.
The formula is as follows:
- When employee worked for less than 1 year: 2* Basic Salary of the employee
- When an employee worked for 1 year or more but it is less than 5 years: 6* Basic Salary of the employee
- When an employee has worked for 5 years or more but less than 11 years: 12* Basic Salary of the employee.
- When an employee has worked between 11 to 20 years: 20* Basic Salary of the employee.
- When an employee has worked 20 years or more: Half of the basic employee salary for every six months can be a maximum of 33 times the salary.
A person eligible for gratuity shall give in writing to the employer. The employer is liable to determine the amount of gratuity and give notice in writing to the employee to receive such amount is due. The time limit to pay the gratuity amount after it is due is 30 days.
When the gratuity amount is not paid within the prescribed time, the employer has to pay simple interest when the payment gets delayed at the rate that the government prescribes.
In case of any dispute regarding the amount of gratuity to the person who receives the amount of gratuity or who pays it shall be dealt with by the controlling authority. And an appeal by the aggrieved party can be made to the appropriate government within 60 days after the orders are received.
Recover of Gratuity
After receiving the application from the aggrieved party, the controlling authority issues a certificate to the collector for recovery of the amount of gratuity, payable by the employer and the compound interest.
Protection of gratuity
The amount of the gratuity payment shall not get diverted in a twisted manner in execution of an order of a civil, criminal or revenue court.
Power to make rules
The appropriate government can make rules in the Payment of Gratuity Act,1927. Such rules shall get declared by notification.
Tax on Gratuity
The tax on gratuity depends upon the employee receiving the gratuity amount. The tax on gratuity amounts differs from organisation to organisation.
- When a Government employee receives gratuity amount: When an employee of Central Government or State Government or local authority receives the amount of gratuity, the amount of tax fully gets exempted from Income Tax.
- When the amount of gratuity gets paid by the employer, covered under the Gratuity Act: When the amount gets paid by the employer covered under the Gratuity Act,1972, then the amount of 15-day salary as per the last drawn salary of an individual is exempted from the tax.
- When the amount of gratuity gets paid by the employer who is not covered under the Gratuity Act: In this case, the amount that gets exempted from the tax is Rs. 10,00,000, the employee receives gratuity, half month’s salary of every year of service that employer has completed in the organisation.
Validation of amendment made in the Gratuity Act
For the validation of the amendment Gratuity Act, the amended rules shall get presented before both the houses of the parliament. When both the houses pass the bill without any annulments and modifications, it is applicable immediately. Otherwise, such modification will have no effect.
Gratuity Act 2020
According to the Gratuity Act, 2020, three labour law bills have been passed by the parliament, including Occupational Safety, Health and Working Conditions Bill, 2020, Industrial Relation Bill, 2020, and Social Security Bill, 2020.
New rules as per Gratuity Act, 2020
According to the new rules framed by the government, the employees appointed for a fixed period or working on a contract basis for one year are eligible to get gratuity.
The employees who work on a contractual basis will now get social security rights similar to the regular employees. A similar benefit is also provided to the employees working on the seasonal establishment.
When will the amount of gratuity be received after new rules
The employees or their nominees will receive gratuity after giving at least five consecutive years to an organisation. The gratuity amount will get paid at the employee’s retirement, resignation, death, or disability from accident or illness.
The tenure of working journalists to receive the gratuity amount gets reduced to three years from five years. Also, the term of five consecutive years is not necessary in case of the death or disability of an employee.
The Payment of Gratuity Act, 1927, is a statute that provides for the welfare of employees. The gratuity increases their efficiency and encourages them to work in the organisation longer. Gratuity can be seen as an amount paid in addition to salary, a provident fund to the employees who work for a long time in an organisation.
The scope of the gratuity act seems to be comparatively less as the act does not apply to the organisation where the number of employees is less than 10. As per the Gratuity Act, 1927, the maximum limit of the gratuity amount is 20 lakh rupees.
Once an employee fulfils the conditions to be qualified to receive gratuity, he gets awarded the amount of gratuity calculated as per the formulas provided. And in the case when the employee has worked for more than six months in a year, for calculation of Gratuity amount it would get considered as one year.
What is the Gratuity Act?
Gratuity Act covers law that offers a lump sum amount by the employer to the employee at the time of retirement or fulfilling any of the specified conditions.
What does the last drawn salary mean as per the Gratuity Act?
Last drawn salary means a basic salary paid to the employee, along with dearness allowance and commission received on sales.
Is the Gratuity act applicable to both public and private companies?
Yes, the Gratuity Act applies to both public and private companies.
What is the basic condition for an employee to be eligible to receive gratuity payment?
To be eligible to receive the amount of gratuity, an employee must complete five years in an organisation and fulfil the eligibility conditions.
Is the employer liable to pay the amount of gratuity even in case of bankruptcy?
Yes, the employer can pay the gratuity amount even in bankruptcy. The act has not provided any court with the power to stay on payment of gratuity amount.