Payment of Gratuity Act, 1972

• Gratuity means lump sum payment to an employee as retirement benefits after :

1. Superannuation
2. Termination of services
3. Resignation
4. Death
5. Physical disablement

• Applicability and Calculation of Gratuity in India

The Payment of Gratuity Act, 1972 (the Gratuity Act) is applicable to:

1. It is applicable in whole of India
2. Employees engaged in factories, mines, oilfields, plantations, ports, railway companies,
3. Shops or other establishments with ten or more employees.
4. Such other establishment where 10 or more employees employed notified by central government.

• Important definition:
• Retirement : Termination of the services of an employee otherwise than an superannuation
• Superannuation: attainment of an employee of such age is fixed in the contact or condition of services as the age on the attainment of which the employee is to vacate the employment.
• Wages : include basic wage + DA

            Wages do not include :

• Any bonus
• commission
• HRA
• Overtime wages 

• Employees means:

Any person(other than apprentice)

Who is employed for wages

In any kind of work – manual or otherwise

• Employer:
• Any person – who has supervision & control
• Head of department
• A manager ,managing director.

• Family :

In case of male employee :

• Himself ,wife ,children (married /unmarried)
• His dependent parents
• His wife dependent parents
• Children of his predeceased son

In case of female employee:

• Same as male

• Qualification condition for gratuity:

5 year of continuous services

*But this condition does not apply in disablement/death.*

Exception of continuous services:

• Accident
• Leave
• Absent from duty due to leave
• Laid off, strike, lockout

In India, gratuity rules and requirements are set out under the Payment of Gratuity Act, 1972. An employer may also choose to pay gratuity outside of that which is required by this Act.

The Payment of Gratuity (Amendment) Act, 2018 enables the government to raise the limit of tax-free gratuity. The change can be made through an executive order by the prime minister.

On February 1, 2019, India’s interim budget hiked the tax-free gratuity limit from Rs 20 lakh The government had doubled the tax free gratuity to Rs 20 lakh (US$27,904) in March, 2018.

Gratuity Calculation Formula

Gratuity in India is calculated using the formula:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service

Notes:

• The ratio 15/26 represents 15 days out of 26 working days in a month.
• Last drawn salary = Basic Salary + Dearness Allowance.
• Years of Service are rounded down to the nearest full year. For example, if the employee has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the calculation.
• Determination & Payment of Gratuity:

If amount is undisputed then ,

Employer has to pay gratuity within 30 days from date it becomes payable.

& if not paid with in period by the employer then,

Employer has to pay with simple interest.

 Tax Exemption

Gratuity received under the Gratuity Act is exempt from taxation to the extent that it does not exceed 15 days’ salary for every completed year of service calculated on the last drawn salary

Any other gratuity is exempt to the extent that it does not exceed one half-month salary for each year of completed service calculated on the basis of average salary for 10 immediately preceding months. The upper limit of US$41,856 applies to the aggregate of gratuity received from one or more employers in the same or different years.

India’s income tax department has put out a taxable gratuity calculator, which can be accessed here.

 Payment of gratuity:

The employer shall arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated.

• If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate not exceeding the rate stipulated by the federal government.

• Gratuity should be paid in cash, or if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.

Forfeiture

The gratuity payable to an employee shall be wholly forfeited if:

• The service of such employee has been terminated for his or her lawless or disorderly conduct or any other act of violence on his or her part; or
• The service of such employee is terminated for any act which constitutes an offense, provided that such offense is committed by him or her in the course of his or her employment.

In order to forfeit gratuity of an employee, there must be a termination order containing charges as established to the effect that the employee was guilty of any of the aforesaid misconducts. In one case, it has been held that in the absence of a termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.

• Penalties: