DEFINITION:An act to provide for a scheme for the payment of gratuity to employees engaged in“Factories, Mines, Oilfields, Plantations, Ports, Railway Companies, Shops or Other Establishments” and for matters connected therewith or incidental thereto. This Act Extends to the whole of India except State of J&K.
Concept of Gratuity:-This is a Social Security enactment. Gratuity is derived from the word “Gratuitous” which means ‘Gift’ or ‘Present’. This is a retirement benefit being paid when the employee retires or leaves the service, so that the employee can live comfortably after retirement.
Applicability:Every factory, mine, oilfield, plantation, port and railway, every shop or establishment within the meaning of any law in which ten or more persons are employed, or were employed, on any day of the preceding twelve months, or to such other establishments as the Central Govt. may, by notification, specify. If once this Act has become applicable to any establishment, it shall continue to be governed by this Act even if the number of persons employed become falls below ten.
Wages: “Wages” shall consist of Basic pay plus D.A. However, allowances like Bonus, Commission, HRA, Overtime etc. are not to be considered for calculations of gratuity payable amount.
Employee: Any Person (other than Apprentice) employed in any Establishment, Factory, Mine, Oilfield, Plantation, Port, Railway Company or Shop, to do any Skilled, Semi-skilled or Unskilled, Manual, Supervisory, Technical or Clerical work, whether terms of such employment are expressed or implied, and whether such Person is Employed in a Managerial or Administrative capacity.
Gratuity is Payable on (a) Resignation (b) Termination on account of Death or Disablement due to Accident or Disease (c) Retirement (d) Death. Normally, Gratuity is payable only after an Employee completes Five Years of Continuous service. But “In case of Death and Disablement, the condition of minimum 5 years’ service is not applicable”.
Out of the several components that make up the gross salary of a salaried individual, gratuity is one. Gratuity is a benefit payable under the Payment of Gratuity Act passed in the year 1972.
What is Meant by Gratuity?
Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. However, gratuity is paid only to employees who complete 5 or more years with the company. It can be understood as a form of tip paid by employer to the employee for services offered in the company. Since tips are a function of culture, various countries have various gratuity limits that are doled out by employers.
How does Gratuity Payment Work?
An employer may offer gratuity to his/her employees from his/her own pocket or may take a group gratuity plan with an insurance provider. Annual contributions are then paid by the employer to the insurance provider for this. The employee too can contribute to his/her gratuity amount. The gratuity paid by the insurance company is based on the clauses in the group insurance scheme.
Payment of Gratuity Act, 1972:
The payment of Gratuity Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and other such establishments which have more than ten employees. The gratuity amount unlike provident fund is totally paid by the employer without any contribution from the employee.
Eligibility Criteria for Gratuity Payment:
Following are the few instances when you will be eligible to receive gratuity.
- An employee should be eligible for superannuation
- An employee retires
- An employee resigns after working for 5 years with a single employer
- An employee passes away or suffers disability due to illness or accident
Formula for Calculation of Gratuity Amount:
Listed below are the components that go into calculation of gratuity amount. The amount is also dependent upon the number of years served in the company and the last drawn salary.
N = number of years of service in a company
B = last drawn basic salary plus DA
Gratuity = N*B*15/26
For example, if Amit is an engineer who has worked with SF Company for 20 years of service and had Rs.25,000 as his last drawn basic plus DA amount, then,
Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54
However, an employer can choose to pay more gratuity to an employee (since it is a form of tip as mentioned in the beginning) but then the amount as restricted by the Gratuity Act cannot exceed more than Rs.10 lac. Anything above the amount Rs.10 lac is known as ex-gratia which is a voluntary contribution and not something compulsorily imposed by the law.
Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number. So, a job held for 6 years 7 months will fetch you gratuity amount for 7 years while that held for 6 years and 4 months will fetch you gratuity amount for 6 years.
Taxation Process of Gratuity:
The taxation process for gratuity depends upon the employee who is receiving the gratuity amount. Two standard cases arise for the calculation of tax on gratuity:
- Government Employee Receiving Gratuity Amount:
In case any employee under the state government, central government or local authority receives gratuity amount than the amount is fully exempt from income tax.
- Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is Covered by Payment of Gratuity Act:
In case of gratuity received by any employee whose employer is covered under the Gratuity Act, the following amount is exempt from tax.
- 15 days salary as per the last drawn salary of the individual
- Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not Covered by Payment of Gratuity Act:
In such a case the least of the following three amounts is exempt from tax.
- Gratuity actually received by employee
- Half month’s salary for every year of service that the employee has completed with the employer
Few Significant Points about Gratuity:
Following are some of the most prominent points about payment of gratuity by an employer to an employee.
- An employee can receive a gratuity amount higher than Rs.10,00,000 from his/her employer, the exemption for tax in this case will be calculated as per the points listed above under taxation.
- The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.
- In case of death of the employee, the nominee or heir of the employee is paid the gratuity amount. The taxation for this is calculated for the receiver under the head – income from other sources.