Payment of Gratuity under Gratuity Act, 1972
GRATUITY as per Indian legal framework
By Sandigdha Mishra, Advocate
advsandigdha@paydirtprofessionals.com
Eligibility to Claim Gratuity:
Five years continuous service: An employee in order to be eligible to claim gratuity, should have worked with a particular employer for at least five years (as per Section 10(10) of the Income Tax Act).
Section 2A of the Gratuity Act, states that ‘continuous period’ shall also include the following:
If in case employee is not in continuous service of one year, he/she shall be deemed to be in continuous service of one year if - he/she has, in immediately preceding twelve calendar months, worked under the employer for not less than:
190 Days (in case of employee employed in mines below ground)
190 Days (in case if employee employed in an establishment which works for less than six days in a week)
240 Days (in any other case)
If in case employee is not in continuous service of six months, he/she shall be deemed to be in continuous service of six months if- he/she has, immediately preceding six calendar months, worked under the employer for not less than:
95 Days (in case of employee employed in mines below ground)
95 Days (in case if employee employed in an establishment which works for less than six days in a week)
120 Days (in any other case)
If an employee of seasonal establishment is not in continuous service of twelve or six months, he/she shall be deemed to be in continuous service of twelve or six months; if he/she actually worked for not less than seventy five percent of the number of days on which the establishment was in operation during such period.
By continuous service for the purpose of gratuity it is meant uninterrupted service which may be interrupted due to accident, sickness, absence for duty without any leave, leave, lay- off, lock-out, strike or cessation of work (due to not any fault of the employee) are considered as continuous service.
Following days shall also be included while calculating the actual days of an employee has worked for:
If an employee has been laid-off under an agreement
If an employee has been on leave with full wages
If an employee has been absent on his duty due to temporary disablement caused by an accident arising out of and in the course of his employment
Maternity leave for female employee, not more than twelve weeks
When is an Employee entitled to claim Gratuity?
On leaving the job: One of the occasions when an employee is entitled to claim gratuity is on the termination of his employment. There can be many reasons for this such as retirement/voluntary retirement, resignation, sometimes the employer may terminate the employee (not for some bad conduct of the employee as in this case the employee may lose his chance of claiming gratuity) or sometimes the employee may find some better opportunity so he might opt for a job-switch.
Death or permanent disablement: The other circumstance where an employee can claim gratuity is in case of his/her death or disablement which renders him permanently incapable of working in that company forever. However in such cases the Income Tax has relaxed the five years criteria, therefore an employee can claim his/her gratuity even if he/she has worked for less than five years. In case of death the nominees of the employee is given the gratuity. If case of the nominee being a minor, the amount of gratuity shall be deposited with the controlling authority. Controlling authority deposit/invest the gratuity amount in a financial institution or bank for benefit of minor, as may be prescribed, until such minor attains majority.
Entities to which the Gratuity rule applies:
Generally every factory and establishment pays gratuity to its employees for the services rendered to it. However the gratuity rules does not mandatorily applies to such entities which have less than 10 persons and the number of employees for this purpose are counted as an average of the last 12 months.
Forfeiture of Gratuity:
The employer may even forfeit the gratuity to which an employee may be entitled to if he leaves his job after 5 years if the company suffers any loss on account of the employees fault or negligence.
Calculation of Gratuity:
Calculation of gratuity depends upon two variables:
Salary, which means Basic Salary+DA (Dearness Allowance)
No. of completed years of service
In calculating the gratuity fifteen days salary is given for every completed year and as the number of working days in a month is considered to be 26 only (excluding the Sundays) therefore the formula for calculating the gratuity would be:
Formula: Last drawn salary x 15/26 x Completed years of Service
In case of an employee working in a seasonal establishment he shall be paid gratuity at the rate of 7 days wages for each season.
Gratuity in case of disabled employee:
If an worker or employee becomes disabled due to a disease or an accident and as a result is not be able to perform the task which he/she was performing prior to such disability, however, is re-employed on some other task/job on reduced wages, he/she shall be paid gratuity as follows:
For the period preceding the disablement: On the basis of last drawn wages by the employee at the time of disablement.
For the period subsequent to disablement: On the basis of last drawn reduced wages by the employee at the time of termination of employment.
When the Employer Approaches a Life Insurer:
There are two ways an employer may pay gratuity to his/her employee, either from his own funds or he may approach a life insurer to purchase a group gratuity plan. When an employer opts for the latter, he has to pay annual contributions as decided by the insurer. However, the employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Tax Treatment of Gratuity:
Gratuity is not entitled to any exemption from tax. When an employee receives gratuity it would be taxable under the head ‘Income from salary’. And when the employee is entitled to gratuity on account of his death it would be fall in the hands of his/her nominee and would be charged under the head ‘Income from other sources’.
For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories
Government employees: They are fully exempt from receipt of gratuity.
Non-government employees covered under the Payment of Gratuity Act, 1972: Maximum exemption from tax is least of the 3 below:
Actual gratuity received;
Rs 10,00,000;
15 days’ salary for each completed year of service or part thereof
Non-government employees not covered under the Payment of Gratuity Act, 1972: Maximum exemption from tax is least of the 3 below:
Actual gratuity received;
Rs 10,00,000;
Half-month’s average salary for each completed year of service
Gratuity not a Subject of Attachment:
Gratuity offered to an employee is exempted from being attached in case of a decree against the employee as from a Civil or a Criminal Court, as a decretal amount or fine, as the case may be.
The Payment of Gratuity Act, 1972 is a beneficial legislature meant for the welfare of employees working under the non-government sector on small pay scale. It is being a beneficial legislature both the parliament and judiciary has given a wider prospective to the scope of legislature to cover the maximum deserving employees in its ambit. In comparison with most of the other countries the Indian law is not restricted just to the cases where contract of employment is prematurely terminated by the employers but it covers almost every case of termination of employment. However Indian law provides for compulsory requirement for the five year continuing service.
While taking care of the hardship on employers the benefit of legislature is limited by a ceiling of Rs. 20 lakhs.
The Act is not applicable of small business entrepreneurs who have less than 10 employees.
Act provides for the security of the amount of gratuity from any attachment and also provides for the compulsory insurance to secure the amount to employee at the time of termination of service. Further the amount of gratuity is not subject to income tax on the hands of employees.
The legislature is competent to provide due share of employees in private sector at the time of their retirement and otherwise termination of services. It stands on different footing in international scenario. However the implementation of the Act in an effective manner suffers due to lack of administrative problems, there is need to redefine the executive rules for the successful implementation of the Act.
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