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Payment of Gratuity Act, 1972

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The Gratuity Act 1972 of India regulates the Gratuity payment given by employers, including the private sector, to their employees. It enhances the financial security of employees who have worked for the same employer for a long time.

The Gratuity Act applies to factories, mines, oilfields, plantations, ports, and railways. This Act applies to public and private sectors with equal or more than 10 employers. This Act regulates the disputes that arise between the employer and the employees upon Gratuity payment during retirement, disability to continue the job, death, termination, or the resignation of the employee from the job. If the employer fails to settle the Gratuity payment, they are subjected to pay the penalties.

What Is the Gratuity Act?

The Gratuity Act regularizes employers’ compensation to their employees for serving them for equal to or more than 5 years. Gratuity is a form of recognition or appreciation given to the employees for further company development. The payment of Gratuity is legalized and regularized as a mandated process in India under the Gratuity Act 1972.

The Gratuity Act satisfies the expectations of employees who work productively and dedicatedly in a company or any organization for the long term.

Eligibility Criteria for Getting Gratuity Payments

The eligibility criteria for Gratuity payment have been framed in the Gratuity Act 1972. Employees can receive gratuity payments when they are unable to continue the job with specific eligibility criteria.

Employees who fall under the below-mentioned eligibility criteria are eligible for Gratuity payments from their employer.

1. The employee must complete equal to or more than 5 years of service under the same employer. This service period excludes sick leave, medical emergencies, and leaves without pay.
2. The employee is eligible to attain superannuation or retire from their service.
3. The employee met with an accident or was diagnosed with a significant disease.
4. Having disabilities due to sudden fall in their health to continue the job.
5. If the employee attains death during service time.

Rule of Gratuity in India

The Gratuity Rules and Regulations were framed under the Gratuity Act 1972 on 21 August 1972 and effectively implemented on 16 September 1972. The rules and restrictions apply to all departments of both the government and private sectors.

The regulations covered in the Gratuity Act 1972 are listed below.

1. The government or private sectors with equal to or more than 10 employees for 12 months are eligible to provide gratuity payments to their employees.
2. The rules framed in the Act also apply to Gratuity payments if the number of employees is reduced to or below 10 in the next year.
3. Gratuity payments are not only applicable to employees’ retirement; one can claim them during VRS, a sudden major accident, termination, resignation, or layoff due to retrenchment.
4. The employer must be responsible for the gratuity payment of their employee.
5. The Gratuity amount is applicable under income tax.

How Is Gratuity Calculated?

The employer uses the Gratuity calculation formula to generate an employee’s Gratuity amount. The formula also lets employees know the amount of their gratuity at the time of claim. The Gratuity formula differs for employees who are covered under the Gratuity payment and who are not covered under the Gratuity payment.

The Gratuity amount calculation formula for the employees who fall under the Gratuity Payment Act: = n*b*15 / 26

1. Here, ‘n’ refers to the number of tenures the employee completes in an organization or a company.
2. ‘b’ refers to the employee’s last drawn salary, including the dearness allowance.

For example,

If an employee has worked in a company for about 10 years and decides to resign, and their basic salary, including the dearness allowance, is Rs. 45,000/-, then the Gratuity amount is calculated using the below-mentioned formula.

Gratuity amount = 10*45000*15/26

= Rs. 259,615.38

The Gratuity amount calculation formula for the employees who are not covered under the Gratuity Payment Act: = n*b*15 / 30

When calculating the number of tenures worked by the employees to calculate their Gratuity amount, if the employee crosses over more than 6 months, it is considered one year in addition to the previous completed years. If it is below 6 months, for example, if an employee works for 7 years and 5 months, then their working period is considered 7 years only; if it is more than 6 months, then their working period is considered 8 years.

How Much Is the Maximum Gratuity Amount One Can Get?

The maximum payable Gratuity amount stated in the Gratuity Act is Rs. 20,00,000/-. Suppose the employee is eligible for a gratuity of more than Rs. 20,00,000/-, considered ex-gratia. The amount that comes under ex-gratia is not liable to be paid to the employee; thus, the ex-gratia amount is known to be voluntary and is not enforced legally by the employer.

Is the Gratuity Amount Taxable?

An individual has to pay income tax if they exceed the eligible amount. The gratuity amount is also considered a part of the employer’s income, so the government levies tax if it exceeds the stated taxable amount. The latest amendment revised the taxable amount limit to the gratuity amount. The previous taxable Gratuity amount was more than Rs.10 lakhs. The newest revision has increased the exemption to Rs.20 lakhs. If an employee gets over Rs. 20 lakhs as a Gratuity amount, they should pay income tax.

What Happens if the Employer Is Not Paid or Is Delayed in Paying the Gratuity Amount?

The employer is responsible for settling the Gratuity amount with their employees at the time of retirement or if they cannot continue the job after they attain the eligibility criteria to get Gratuity payment. If the employer delays or does not settle the Gratuity amount, the employee can send legal notice to the employer.

If the employer does not respond to the legal notice, the employee can file a complaint with the city labor commissioner. The employer has to pay a penalty and settle the Gratuity amount with interest for the delaying period.

In Which Case Can the Employer Reject the Gratuity Payment?

In certain situations, the employer can reject the gratuity settlement for their employees even though they are eligible for the gratuity payment. Such conditions are if the employee violates the agreement signed during their onboarding process if they share the confidential things of the employer, are involved in moral indulgence or malpractice in the working environment, and are not eligible to avail of the Gratuity payment. They are supposed to be terminated by the employer without settlement of the Gratuity amount.

Conclusion

The Gratuity Act 1972 supports employees by providing financial security after retirement or in case of resignation, termination, demise, or any other disabilities due to an accident. After 5 years of service, employees under the same employer are eligible for a Gratuity amount.

The Gratuity amount is taxable if it exceeds Rs.20 lakhs. The employer and HR professional must be familiar with labor law’s latest revision of the Gratuity Act 1972.

If controversies arise between the employer and the employee, the labor commissioner takes the necessary action. If you have worked for over 5 years in any organization or company, you can receive the Gratuity. Suppose you are a business professional with employees equal to or over 10. In that case, you must provide Gratuity payments to your employees even if your employee count is below 10 in the next year.

Frequently Asked Questions

1. Does the Gratuity Rule Differ for Private-Sector Employees?

Employees who have worked for the same employer for more than 5 years are liable to receive a Gratuity amount from their employer. This applies to both public and private sector employees. The Gratuity amount varies based on the basic salary and the number of tenures of employee service.

2. Is the Gratuity Payment Deducted From the Employee’s Monthly Salary?

The gratuity amount is given by the employer to their employees who have worked for them for more than 5 years. So that the Gratuity amount is given in terms of appreciation or recognition of the employee’s work and is also a financial security or backup or insurance for the employee, it is not deducted from the employee’s monthly salary. But it is calculated by the Gratuity amount calculation formula n*b*15 / 26 or n*b*15 / 30 based on the conditions under which the employees come.

3. Who Gets the Gratuity Amount in Case of the Employee’s Demise?

The Gratuity amount is considered a type of insurance for serving in the company or organization for more than 5 years by an employee. If the employee met with a demise, the nominee of the employee can claim the Gratuity amount from the employer. Usually, the employee’s nominee is their spouse or children. The employer is responsible for settling the gratuity amount with their nominee immediately.

4. Does the Gratuity Amount Include an Employee Contribution?

Unlike the provident fund, the Gratuity payment does not involve the employee’s contribution. The amount is provided to the employee by the employer.

5. Is the Gratuity Amount Equal for All Employees?

The gratuity amount is calculated using the formula based on the employee’s service tenure and basic salary. The Gratuity amount is not the same for all employees; it differs for each employee based on their service duration and basic salary.

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