DISCLAIMER: –
THE INFORMATION PROVIDED IN THIS ARTICLE ON GRATUITY AND THE PAYMENT OF GRATUITY ACT, 1972 IS FOR GENERAL EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. WHILE EVERY EFFORT HAS BEEN MADE TO ENSURE THE ACCURACY AND COMPLETENESS OF THE CONTENT, THE WEBSITE OWNER DOES NOT MAKE ANY WARRANTIES OR REPRESENTATIONS REGARDING THE CORRECTNESS, RELIABILITY OR APPLICABILITY OF THE INFORMATION.
LAWS, RULES, LIMITS AND INTERPRETATIONS RELATED TO GRATUITY ARE SUBJECT TO CHANGE DUE TO AMENDMENTS, NOTIFICATIONS, COURT JUDGMENTS OR GOVERNMENT POLICIES. THE WEBSITE OWNER SHALL NOT BE HELD RESPONSIBLE FOR ANY LOSS, DAMAGE OR INCONVENIENCE ARISING DIRECTLY OR INDIRECTLY FROM THE USE OF THE INFORMATION CONTAINED IN THIS ARTICLE.
THIS CONTENT SHOULD NOT BE CONSIDERED AS LEGAL, FINANCIAL OR PROFESSIONAL ADVICE. READERS ARE STRONGLY ADVISED TO REFER TO THE OFFICIAL PAYMENT OF GRATUITY ACT, 1972, GOVERNMENT NOTIFICATIONS, OR CONSULT A QUALIFIED LEGAL OR FINANCIAL PROFESSIONAL FOR SPECIFIC CASES OR DISPUTES.
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INTRODUCTION:-
GRATUITY IS ONE OF THE MOST IMPORTANT STATUTORY RETIREMENT BENEFITS PROVIDED TO EMPLOYEES IN INDIA. IT IS A LUMP-SUM AMOUNT PAID BY AN EMPLOYER TO AN EMPLOYEE AS A MARK OF GRATITUDE FOR THE SERVICES RENDERED BY THE EMPLOYEE OVER A LONG PERIOD. THE CONCEPT OF GRATUITY IS DEEPLY ROOTED IN THE IDEA OF SOCIAL SECURITY AND FINANCIAL STABILITY FOR EMPLOYEES AFTER RETIREMENT, RESIGNATION OR IN CERTAIN UNFORESEEN CIRCUMSTANCES SUCH AS DISABILITY OR DEATH.
IN INDIA, GRATUITY IS GOVERNED BY A SPECIFIC LAW KNOWN AS THE PAYMENT OF GRATUITY ACT, 1972. THIS ACT ENSURES THAT EMPLOYEES WORKING IN CERTAIN ESTABLISHMENTS RECEIVE GRATUITY AS A STATUTORY RIGHT, PROVIDED THEY FULFILL THE ELIGIBILITY CONDITIONS LAID DOWN UNDER THE ACT. OVER THE YEARS, THE ACT HAS UNDERGONE AMENDMENTS TO EXPAND ITS SCOPE AND ENHANCE EMPLOYEE BENEFITS.
THIS ARTICLE PROVIDES A COMPLETE AND DETAILED EXPLANATION OF GRATUITY FOR YOUR WEBSITE, INCLUDING THE ORIGIN OF THE ACT, DEFINITIONS, APPLICABILITY, ELIGIBILITY, CALCULATION FORMULAS, EXEMPTIONS, TAX TREATMENT AND MULTIPLE PRACTICAL EXAMPLES.
HISTORY AND ORIGIN OF THE GRATUITY ACT:-
BEFORE THE ENACTMENT OF THE PAYMENT OF GRATUITY ACT, 1972, GRATUITY WAS PAID BY EMPLOYERS PURELY AS A VOLUNTARY BENEFIT. THERE WAS NO UNIFORM LAW GOVERNING THE PAYMENT AND EMPLOYEES HAD NO LEGAL RIGHT TO CLAIM GRATUITY.
TO PROTECT THE INTERESTS OF EMPLOYEES AND TO ENSURE UNIFORMITY IN GRATUITY PAYMENT, THE GOVERNMENT OF INDIA ENACTED THE PAYMENT OF GRATUITY ACT, 1972, WHICH CAME INTO FORCE ON 21ST SEPTEMBER 1972. THE ACT APPLIES TO THE WHOLE OF INDIA AND PROVIDES A STATUTORY FRAMEWORK FOR GRATUITY PAYMENT.
THE OBJECTIVE OF THE ACT IS:-
TO PROVIDE A SOCIAL SECURITY BENEFIT TO EMPLOYEES
TO REWARD LONG AND CONTINUOUS SERVICE
TO ENSURE FINANCIAL SUPPORT AFTER RETIREMENT OR TERMINATION
WHAT IS GRATUITY? (DEFINITION)
AS PER SECTION 2(E) OF THE PAYMENT OF GRATUITY ACT, 1972, GRATUITY MEANS:
“GRATUITY MEANS A LUMP SUM AMOUNT PAYABLE BY AN EMPLOYER TO AN EMPLOYEE ON TERMINATION OF EMPLOYMENT AFTER RENDERING CONTINUOUS SERVICE FOR NOT LESS THAN FIVE YEARS.”
GRATUITY BECOMES PAYABLE ON:-
SUPERANNUATION (RETIREMENT)
RESIGNATION
RETIREMENT OR VOLUNTARY RETIREMENT
DEATH OR DISABLEMENT DUE TO ACCIDENT OR DISEASE
IN CASE OF DEATH, GRATUITY IS PAID TO THE NOMINEE OR LEGAL HEIR AND THE CONDITION OF FIVE YEARS OF SERVICE IS NOT REQUIRED.
APPLICABILITY OF THE PAYMENT OF GRATUITY ACT, 1972
THE ACT APPLIES TO THE FOLLOWING ESTABLISHMENTS:
- FACTORIES
- MINES
- OILFIELDS
- PLANTATIONS
- PORTS
- RAILWAY COMPANIES
- SHOPS OR ESTABLISHMENTS EMPLOYING 10 OR MORE PERSONS ON ANY DAY IN THE PRECEDING 12 MONTHS
ONCE THE ACT BECOMES APPLICABLE TO AN ESTABLISHMENT, IT CONTINUES TO APPLY EVEN IF THE NUMBER OF EMPLOYEES FALLS BELOW 10 LATER.
WHO IS AN EMPLOYEE UNDER THE ACT?
ACCORDING TO SECTION 2(E) OF THE ACT, AN EMPLOYEE IS A PERSON WHO:
IS EMPLOYED FOR WAGES
WORKS IN ANY ESTABLISHMENT COVERED UNDER THE ACT
IS EMPLOYED IN MANAGERIAL, ADMINISTRATIVE, SUPERVISORY, TECHNICAL, OR CLERICAL ROLES
BOTH PERMANENT AND TEMPORARY EMPLOYEES ARE COVERED, PROVIDED THEY SATISFY THE CONDITIONS OF CONTINUOUS SERVICE.
MEANING OF CONTINUOUS SERVICE
CONTINUOUS SERVICE PLAYS A CRUCIAL ROLE IN DETERMINING GRATUITY ELIGIBILITY.
AN EMPLOYEE IS SAID TO BE IN CONTINUOUS SERVICE IF HE/SHE HAS WORKED:
WITHOUT INTERRUPTION, OR
WITH INTERRUPTIONS DUE TO SICKNESS, ACCIDENT, LEAVE, LAY-OFF, STRIKE, LOCKOUT, OR CESSATION OF WORK NOT DUE TO EMPLOYEE’S FAULT
DEEMED CONTINUOUS SERVICE
IF AN EMPLOYEE HAS NOT WORKED CONTINUOUSLY FOR ONE YEAR, HE/SHE WILL STILL BE CONSIDERED IN CONTINUOUS SERVICE IF HE/SHE HAS WORKED:
AT LEAST 240 DAYS IN THE PRECEDING 12 MONTHS (FOR MOST ESTABLISHMENTS)
AT LEAST 190 DAYS FOR EMPLOYEES WORKING IN MINES OR SEASONAL ESTABLISHMENTS
ELIGIBILITY FOR GRATUITY
AN EMPLOYEE BECOMES ELIGIBLE FOR GRATUITY IF:
- HE/SHE HAS COMPLETED AT LEAST 5 YEARS OF CONTINUOUS SERVICE WITH THE SAME EMPLOYER
- EMPLOYMENT IS TERMINATED DUE TO:
- RETIREMENT OR SUPERANNUATION
- RESIGNATION
- DEATH OR DISABLEMENT (5-YEAR CONDITION NOT REQUIRED)
IMPORTANT EXCEPTION
IN CASE OF DEATH OR PERMANENT DISABILITY, GRATUITY IS PAYABLE EVEN IF THE EMPLOYEE HAS NOT COMPLETED FIVE YEARS OF SERVICE.
WHEN CAN GRATUITY BE FORFEITED?
GRATUITY CAN BE FORFEITED PARTIALLY OR FULLY IF:
- THE EMPLOYEE’S SERVICES ARE TERMINATED DUE TO WILLFUL MISCONDUCT
- THE EMPLOYEE CAUSES DAMAGE OR LOSS TO THE EMPLOYER’S PROPERTY
- THE EMPLOYEE IS TERMINATED FOR RIOTOUS OR DISORDERLY CONDUCT
FORFEITURE MUST BE STRICTLY AS PER THE PROVISIONS OF THE ACT.
HOW IS GRATUITY CALCULATED?
GRATUITY CALCULATION DEPENDS ON WHETHER THE ESTABLISHMENT IS COVERED UNDER THE PAYMENT OF GRATUITY ACT OR NOT.
GRATUITY FORMULA (FOR EMPLOYEES COVERED UNDER THE ACT)
WHERE:
- 15 = 15 DAYS’ WAGES
- 26 = NUMBER OF WORKING DAYS IN A MONTH
- LAST DRAWN SALARY = BASIC SALARY + DEARNESS ALLOWANCE (DA)
ANY SERVICE PERIOD EXCEEDING 6 MONTHS IS ROUNDED OFF TO THE NEXT FULL YEAR.
GRATUITY CALCULATION EXAMPLES
EXAMPLE 1: NORMAL CASE
- LAST DRAWN SALARY (BASIC + DA): ₹30,000
- YEARS OF SERVICE: 10 YEARS
GRATUITY = (15 × 30,000 × 10) / 26
GRATUITY = ₹1,73,077 (APPROX.)
EXAMPLE 2: SERVICE MORE THAN 6 MONTHS
- LAST DRAWN SALARY: ₹40,000
- YEARS OF SERVICE: 7 YEARS AND 8 MONTHS
SINCE SERVICE EXCEEDS 6 MONTHS, IT IS ROUNDED TO 8 YEARS.
GRATUITY = (15 × 40,000 × 8) / 26
GRATUITY = ₹1,84,615 (APPROX.)
EXAMPLE 3: DEATH OF EMPLOYEE
- SALARY: ₹25,000
- SERVICE PERIOD: 3 YEARS
EVEN THOUGH THE EMPLOYEE HAS NOT COMPLETED 5 YEARS, GRATUITY IS PAYABLE.
GRATUITY = (15 × 25,000 × 3) / 26 = ₹43,269 (APPROX.)
MAXIMUM LIMIT OF GRATUITY
AS PER THE LATEST AMENDMENT, THE MAXIMUM GRATUITY PAYABLE UNDER THE ACT IS ₹20,00,000 (TWENTY LAKH RUPEES).
ANY AMOUNT PAID ABOVE THIS LIMIT IS TREATED AS EX-GRATIA AND IS NOT COVERED UNDER THE ACT.
TIME LIMIT FOR PAYMENT OF GRATUITY
- THE EMPLOYER MUST PAY GRATUITY WITHIN 30 DAYS FROM THE DATE IT BECOMES PAYABLE
- IF PAYMENT IS DELAYED, THE EMPLOYER IS LIABLE TO PAY SIMPLE INTEREST
NOMINATION FOR GRATUITY
EVERY EMPLOYEE WHO HAS COMPLETED ONE YEAR OF SERVICE MUST SUBMIT A NOMINATION FORM TO THE EMPLOYER.
- NOMINATION ENSURES SMOOTH PAYMENT OF GRATUITY IN CASE OF DEATH
- NOMINATION CAN BE MODIFIED DURING SERVICE
TAX TREATMENT OF GRATUITY
FOR GOVERNMENT EMPLOYEES
- GRATUITY RECEIVED IS FULLY EXEMPT FROM INCOME TAX
FOR NON-GOVERNMENT EMPLOYEES COVERED UNDER THE ACT
THE LEAST OF THE FOLLOWING IS EXEMPT:
- ACTUAL GRATUITY RECEIVED
- ₹20,00,000
- CALCULATED GRATUITY AS PER ACT
FOR EMPLOYEES NOT COVERED UNDER THE ACT
EXEMPTION IS THE LEAST OF:
- ACTUAL GRATUITY RECEIVED
- ₹20,00,000
- HALF MONTH’S AVERAGE SALARY FOR EACH COMPLETED YEAR OF SERVICE
EMPLOYER’S RESPONSIBILITY
- OBTAIN GRATUITY INSURANCE OR CREATE A GRATUITY FUND
- DISPLAY NOTICE OF GRATUITY RULES
- MAINTAIN RECORDS AND REGISTERS
- MAKE TIMELY PAYMENT
EMPLOYEE’S RIGHTS UNDER THE ACT
- RIGHT TO CLAIM GRATUITY
- RIGHT TO INTEREST ON DELAYED PAYMENT
- RIGHT TO APPROACH THE CONTROLLING AUTHORITY IN CASE OF DISPUTE
ROLE OF CONTROLLING AUTHORITY
THE CONTROLLING AUTHORITY:
- DECIDES DISPUTES RELATED TO GRATUITY
- CONDUCTS INQUIRIES
- DIRECTS EMPLOYERS TO PAY GRATUITY WITH INTEREST
PENALTIES UNDER THE ACT
- NON-PAYMENT OR FALSE STATEMENTS CAN ATTRACT PENALTIES
- IMPRISONMENT UP TO 2 YEARS OR FINE OR BOTH
CONCLUSION
THE PAYMENT OF GRATUITY ACT, 1972 PLAYS A VITAL ROLE IN PROVIDING FINANCIAL SECURITY TO EMPLOYEES IN INDIA. GRATUITY IS NOT A CHARITY BUT A STATUTORY RIGHT EARNED THROUGH LONG AND DEDICATED SERVICE. UNDERSTANDING ITS PROVISIONS, ELIGIBILITY, AND CALCULATION HELPS EMPLOYEES PLAN THEIR FUTURE BETTER AND ENSURES EMPLOYERS COMPLY WITH THE LAW.
FOR EMPLOYEES, GRATUITY ACTS AS A VALUABLE RETIREMENT CORPUS, WHILE FOR EMPLOYERS, IT REFLECTS RESPONSIBLE AND LAWFUL EMPLOYMENT PRACTICES. A CLEAR UNDERSTANDING OF GRATUITY BENEFITS STRENGTHENS TRUST BETWEEN EMPLOYERS AND EMPLOYEES AND CONTRIBUTES TO A STABLE WORKFORCE.
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