What is Gratuity? Applicability for Gratuity, Eligibility for Gratuity, Calculation for Gratuity, Reasons for Gratuity Forfeiture, Forms Related to Gratuity.
Gratuity is an important aspect of employee benefits in India. It is a monetary benefit provided to employees as a token of appreciation for their long and continuous service to an organization. This comprehensive guide aims to shed light on various aspects of gratuity in India, including its definition, eligibility criteria, calculation, taxation, and related forms.
Definition and Applicability
Gratuity is defined under the Payment of Gratuity Act, 1972, which is a statutory provision applicable to establishments employing ten or more employees. It covers employees working in factories, mines, oilfields, plantations, ports, railways, shops, or other establishments falling under the purview of the Act.
Eligibility Criteria for Gratuity
To be eligible for gratuity in India, an employee must meet the following criteria:
a. Completion of Five Years of Service: An employee becomes eligible for gratuity only after completing a minimum of five years of continuous service with the same employer. However, in the case of death or disability, this requirement may be waived.
b. Termination Due to Death or Disability: If an employee’s service is terminated due to death or disability before completing five years, the gratuity is payable even if the employee has not met the minimum service requirement.
c. All Categories of Employees: Gratuity is applicable to all employees, including permanent, temporary, contractual, and even trainees. However, apprentices covered under the Apprentices Act, 1961, are exempted from gratuity.
Calculation of Gratuity
The amount of gratuity is calculated based on a formula prescribed by the Act, which takes into account the employee’s last drawn salary and the number of years of service. The formula is as follows:
Gratuity = (Last Drawn Salary × 15/26) × (Number of Completed Years of Service)
Here, the last drawn salary refers to the basic salary plus dearness allowance (DA) and includes any commission received on sales. The 15/26 fraction represents 15 working days out of a total of 26 working days in a month.
For instance, if a person has been employed in the company for 16 years, and, the total last basic salary drawn and dearness allowance amounts to Rs. 35,000/-, then, as per the formula, gratuity is as follows:
Gratuity Amount = (Rs. 35,000 x 15/26) x 16 = Rs. 3,23,077/-
Points To Remember in Gratuity Calculation
- In gratuity calculation, the total number of months worked in the last year of employment is taken into account.
- If an individual has worked for more than six months in the final year, the employer considers the service period as a whole year.
- Conversely, if the duration is less than six months, that specific year is excluded from the calculation.
For instance, if the service period is 16 years and seven months, the gratuity calculation considers 17 years of service. On the other hand, if the service period is 16 years and four months, only 16 years are taken into account for gratuity calculation.
Taxation of Gratuity
Gratuity received by employees is subject to taxation, but there are certain exemptions and limits provided under the Income Tax Act, 1961. The tax exemptions on gratuity are as follows:
a. Government Employees: For government employees, the entire amount of gratuity received is tax-exempt.
b. Non-Government Employees: For non-government employees covered under the Payment of Gratuity Act, the exemption limit is the least of the following:
- Actual gratuity received.
- 15 days’ salary for each completed year of service, based on the last drawn salary.
- Rs. 20 lahks (subject to any future revisions by the government).
Forfeiture of Gratuity
The forfeiture of gratuity occurs under certain circumstances as specified in the Payment of Gratuity Act, 1972. According to the Act, an employee’s gratuity can be forfeited if the employee has been terminated from service due to any of the following reasons:
- Willful omission or negligence causing damage or destruction to the employer’s property.
- Behaving in a disorderly manner or committing an act of violence on the employer’s premises.
- Acts such as theft, fraud, or dishonesty related to the employer’s business or property.
- Unauthorized disclosure of any confidential information related to the employer’s business or trade secrets.
- A conviction for an offense involving moral turpitude while on duty.
- Any other act that constitutes an offense involving moral turpitude as specified by the employer in the employment contract.
Note: It’s important to note that the employer needs to establish that the employee’s actions fall within the above-mentioned grounds for forfeiture, and the forfeiture can only be made if it is explicitly provided for in the employment contract or company policy.
If an employer wishes to forfeit an employee’s gratuity, they must follow a proper disciplinary procedure, including providing the employee with an opportunity to present their case and conducting an inquiry into the allegations. The employer should communicate the reasons for the forfeiture in writing to the employee, clearly stating the grounds and providing an opportunity for the employee to respond.
If an employer unjustly forfeits an employee’s gratuity without proper justification or following due process, the employee has the right to challenge the forfeiture. In such cases, the employee can approach the appropriate labor authorities or labor court to seek redressal.
Forms Pertaining to Gratuity
Gratuity is a significant employee benefit in India that provides financial assistance to employees upon retirement, resignation, or death. To facilitate the gratuity process, certain forms need to be filled out by the concerned parties involved. Let’s dive into the details of these forms:
The employer is required to submit Form A to the relevant controlling authority of the area within 30 days from the date when the rules become applicable to the establishment.
The employer must submit Form B to the controlling authority of the area within a period of 30 days in the event of any changes in the name, address, employer, or nature of business.
If an employer intends to cease operations and close down the business, they are required to submit a notice in the provided format (Form C) to the controlling authority of the area at least 60 days prior to the planned closure.
The nomination should be submitted by the employee in duplicate and in the provided format (Form F). The submission can be done either by personal service, ensuring a proper receipt is obtained, or by sending it through registered post with acknowledgment due to the employer.
The deadline for accepting nominations is as follows:
- For employees who have already been employed for a year or more on the date of the implementation of these rules, the nomination should be submitted within 90 days from that date.
- For employees who complete one year of service after the date of implementation of these rules, the nomination should be submitted within 30 days of completing one year of service.
If an employee does not have any family members at the time of making a nomination, they must submit a fresh nomination to the employer within the specified time limit.
The fresh nomination should reach the employer within 90 days of the employee acquiring a family.
A nomination, fresh nomination, or notice of modification of nomination should be signed by the employee. In case the employee is illiterate, their thumb impression should be affixed. This should be done in the presence of two witnesses who will also sign a declaration confirming the same in the nomination document.
In case of any modifications to a nomination, including scenarios where a nominated individual passes away before the employee, a notice of modification must be submitted to the employer in duplicate and in the specified format (Form H).
A nomination, fresh nomination, or notice of modification of nomination should be signed by the employee. If the employee is illiterate, their thumb impression should be affixed. Two witnesses must be present during the signing, and they should also sign a declaration confirming their presence and attesting to the validity of the nomination.
Employees who are eligible for gratuity payment under the Act, or individuals authorized in writing to act on their behalf, are required to submit an application to the employer using the provided format (Form I). Typically, this application should be made within a period of 30 days from the date when the gratuity becomes payable.
However, if the date of superannuation or retirement of an employee is known in advance, they have the option to submit the application to the employer prior to 30 days from the designated date of superannuation or retirement.
The nominee of an employee eligible for gratuity payment should typically submit an application to the employer, in the provided format (Form J), within 30 days from the date the gratuity becomes payable to them.
The legal heir of an eligible employee, entitled to receive gratuity payment, should typically submit an application to the employer, in the provided format (Form K), within one year from the date the gratuity becomes payable to them.
If the claim is deemed valid upon verification, the employer must provide a notice to the applicant employee, nominee, or legal heir within the prescribed time after receiving the application for gratuity payment. The notice should specify the amount of gratuity to be paid and set a payment date, which should not exceed 30 days from the date of receiving the application.
Additionally, a copy of the notice should be sent to the controlling authority for their records.
If the claim for gratuity is deemed inadmissible, the employer is obligated to issue a notice to the applicant employee, nominee, or legal heir within the designated timeframe upon receiving the application for gratuity payment. The notice should specify the reasons why the claim for gratuity is not considered admissible.
Furthermore, a copy of the notice should be forwarded to the controlling authority for their reference.
If an employer refuses to accept a nomination, accepts a claim with a reduced amount, or fails to provide either Form M or N within the specified time limit, the claimant employee, nominee, or legal heir, as applicable, has the right to apply to the controlling authority for the issuance of a direction. This application should be made within 90 days from the occurrence of the cause for the application, using the provided format. The application should include as many extra copies as there are opposing parties involved.
If an employer fails to make the gratuity payment as required by the Act, following the notice from the controlling authority, the concerned employee, nominee, or legal heir, as applicable, to whom the gratuity is owed, may submit an application for recovery to the controlling authority. This application should be made in duplicate using the provided format (Form T).
Gratuity plays a significant role in recognizing an employee’s long-term commitment and loyalty toward an organization. It provides financial security to employees and serves as a vital employee benefit. Understanding the eligibility criteria, calculation methods, and taxation provisions associated with gratuity is essential for both employers and employees in India. By adhering to the provisions of the Payment of Gratuity Act, employers can ensure the well-being and satisfaction of their workforce, while employees can be aware of their rights and entitlements.
Frequently Asked Questions:
Q: What is gratuity?
Ans: Gratuity is a lump sum amount paid to an employee by their employer as a token of appreciation for the employee’s long and meritorious service. It is typically paid at the time of retirement, resignation, or upon death or disablement due to an accident or illness.
Q: Who is eligible to receive gratuity in India?
Ans: In India, gratuity is applicable to employees working in establishments with 10 or more employees. To be eligible for gratuity, an employee must have completed a minimum of five years of continuous service with the same employer.
Q: Is gratuity applicable to all types of employees?
Ans: No, gratuity is not applicable to all types of employees. It is applicable to employees covered under the Payment of Gratuity Act, 1972, which includes employees in factories, mines, oil fields, plantations, ports, railways, shops, or other establishments as specified by the government.
Q: How is the gratuity amount calculated?
Ans: The gratuity amount is calculated based on a formula specified under the Payment of Gratuity Act. As of September 2017, the formula is: (Last drawn salary × 15 × number of completed years of service) / 26. Here, the “last drawn salary” refers to the employee’s basic salary plus dearness allowance.
Q: Is there a maximum limit on the gratuity amount?
Ans: Yes, the maximum limit on the gratuity amount is currently set at Rs. 20 lahks. Even if the formula calculation exceeds this limit, the gratuity amount cannot exceed Rs. 20 lahks.
Q: Is there a minimum limit on the gratuity amount?
Ans: Yes, the minimum limit for the payment of gratuity is the equivalent of 15 days of wages for each completed year of service. However, it is important to note that some employers may provide higher gratuity benefits than the minimum requirement.
Q: Can gratuity be forfeited or withheld?
Ans: Yes, gratuity can be forfeited or withheld in certain cases. If an employee has been terminated for any act involving moral turpitude, such as theft or dishonesty, the employer has the right to forfeit the gratuity. Additionally, if an employee’s service has been terminated due to willful omission or negligence causing damage or loss to the employer, the gratuity can be withheld.
Q: Is gratuity taxable in India?
Ans: No, gratuity is not fully taxable in India. There are certain tax exemptions available for gratuity. As of the current tax regulations, the maximum tax exemption limit for gratuity is Rs. 20 lahks. Any amount received as gratuity up to this limit is exempt from income tax. However, any amount exceeding this limit will be taxable as per the individual’s income tax slab.
Q: When should an employer pay gratuity to an employee?
Ans: An employer should pay the gratuity amount to an eligible employee within 30 days from the date it becomes payable. If there is any delay, the employer may have to pay the employee interest on the delayed payment.
Q: Are there any specific rules regarding the utilization of gratuity?
Ans: There are no specific rules regarding the utilization of gratuity. Once received, the employee has full discretion over how they wish to utilize the gratuity amount. They can use it for any personal or financial purpose according to their needs and preferences.
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