Gratuity is a financial benefit employers provide to employees as a token of appreciation for their continuous service. Governed by the Payment of Gratuity Act, 1972, this benefit is crucial for employees planning their financial future. This article delves into the nuances of gratuity in India, including eligibility criteria, calculation methods, tax implications, and other essential aspects.
What is Gratuity?
Gratuity is a lump-sum payment made by an employer to an employee in recognition of the employee’s service tenure. It is a form of financial security and is typically disbursed upon retirement, resignation, or other specified circumstances.
Applicability of the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972, applies to:
- Factories, Mines, Oilfields, Plantations, Ports, and Railway Companies: All such establishments are mandated to comply with the Act.
- Shops and Establishments with 10 or More Employees: Any shop or establishment employing ten or more individuals on any day of the preceding twelve months falls under the purview of this Act.
Once an organization becomes subject to the Act, it remains bound by its provisions even if the employee count falls below ten subsequently.
Eligibility Criteria for Gratuity
An employee is eligible to receive gratuity if they meet the following conditions:
- Continuous Service of Five Years: The employee must have completed at least five years of uninterrupted service with the employer. However, this requirement is waived in cases of death or disablement due to accident or disease.
- Circumstances of Termination: Gratuity is payable upon:
- Superannuation (retirement at the age specified by the employer)
- Resignation or retirement after completing five years of service
- Death or disablement due to accident or illness (in such cases, the five-year rule is not applicable)
Definition of Continuous Service
Continuous service refers to an unbroken period of employment. However, certain interruptions do not break this continuity, including:
- Sickness
- Accidents
- Maternity leave (up to 26 weeks as per the 2018 amendment)
- Leave with full wages
- Absence due to layoff, strike, or lockout
- Temporary disablement
Calculating Gratuity Amount
The formula for calculating gratuity varies based on whether the employee is covered under the Act:
For Employees Covered Under the Act:
Gratuity = (Last Drawn Salary × 15/26) × Number of Completed Years of Service
- Last Drawn Salary: Includes basic salary and dearness allowance.
- 15/26: Represents 15 days out of 26 working days in a month.
- Completed Years of Service: If an employee has worked for more than six months in a year, it is rounded up to the next full year. For instance, 10 years and 7 months are considered as 11 years.
Example:
An employee with a last drawn salary (basic + dearness allowance) of Rs. 50,000 and 10 years and 7 months of service:
Gratuity = (Rs. 50,000 × 15/26) × 11 = Rs.3,17,307.69
For Employees Not Covered Under the Act:
Gratuity = (Last Drawn Salary × 15/30) × Number of Completed Years of Service
- 15/30: Represents half a month’s salary.
- Completed Years of Service: Only full years are considered; fractions are ignored. For example, 10 years and 7 months are considered as 10 years.
Example:
An employee with a last drawn salary of Rs.50,000 and 10 years and 7 months of service:
Gratuity = (Rs.50,000 × 15/30) × 10 = Rs.2,50,000
Tax Implications of Gratuity
Gratuity received by an employee is subject to tax exemptions as per the Income Tax Act:
- Government Employees: Fully exempt from income tax.
- Non-Government Employees Covered Under the Act: The least of the following is exempt:
- Actual gratuity received
- Rs.20 lakhs (as per the amended Act)
- (Last Drawn Salary × 15/26) × Completed Years of Service
- Non-Government Employees Not Covered Under the Act: The least of the following is exempt:
- Actual gratuity received
- Rs.20 lakh
- (Average Salary of Last 10 Months × 15/30) × Completed Years of Service
Any gratuity amount exceeding the exempted limit is taxable as per the individual’s income tax slab.
Payment and Forfeiture of Gratuity
- Payment Timeline: Employers are required to disburse the gratuity amount within 30 days from the date it becomes payable. Failure to do so may attract interest on the amount from the due date until the payment date.
- Forfeiture Conditions: Gratuity can be wholly or partially forfeited if the employee’s service is terminated due to:
- Disorderly conduct involving violence
- Offenses involving moral turpitude during employment
- Willful omission or negligence causing damage or loss to the employer’s property
Gratuity in Case of Employee’s Death
In the unfortunate event of an employee’s death, gratuity is payable to the nominee or legal heir, even if the employee had not completed five years of service. The amount is calculated based on the tenure of service, with specific multiples of the basic salary as per the completed years, subject to a maximum of Rs.20 lakhs.
