is a statutory benefit paid to the employees who have rendered continuous service for at least five years. It is a lump sum amount paid to an employee based on the duration of his total service. The benefit gratuity is payable to an employee on cessation of employment (either by resignation, death, retirement or termination, etc) by taking the last drawn salary as the basis for the calculation. Gratuity is an important form of social security and is in the form of a gratitude provided by the employer to the employees in monetary terms for the services rendered by them to the organisation. It is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. Gratuity payment liability of the employer tends to increase with an increase in the salary and tenure of employment. Payment of Gratuity Act, 1972
provides for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. The Payment of Gratuity Act is administered by the Central Government in establishments under its control, establishments having branches in more than one State, major ports, mines, oil fields and the railways and by the State governments and Union Territory administrations in all other cases.
The employer may pay the gratuity proceeds from his current revenue. They may set up a gratuity fund as a part of their financial planning. Many insurance companies have designed special schemes which relate to gratuity.
Applicabilty of The Act
The Payment of Gratuity Act, 1972 is applicable to the following:
- every factory, mine, oilfield, plantation, port and railway company;
- 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;
- such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.
Once the Payment of Gratuity Act becomes applicable to an organization, the Act would continue to be applicable to the same despite the fact that the number of employees gets reduced than the minimum prescribed.
The Act extends to whole of India but i9t does not extend to the State of Jammu and Kashmir so far as it relates to plantations or ports.
Who is Eligible for Gratuity
An employee is any person (other than an apprentice) employed on wages, 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 the terms of such employment are expressed or implied and whether or not such person is employed in a managerial or administrative capacity, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.
An employee who has rendered not less than five years of service becomes entitled to gratuity on his superannuation or on his retirement or resignation or on his death or disablement. The pre requisite of completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement. Disablement in such a case would mean disablement which incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement.
In the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority. Family in relation to an employee shall be deemed to consist of in the case of a male employee, himself, his wife, his children, whether married or unmarried, his dependent parents the dependent parents of his wife and the widow and children of his predeceased son, if any.
In case of female employees, family includes female employee, herself, her husband, her children, whether married or unmarried, her dependent parents and the dependent parents of her husband and the widow and children of her predeceased son, if any. Where the personal law of an employee permits the adoption by him of a child, any child lawfully adopted by him shall be deemed to be included in his family, and where a child of an employee has been adopted by another person and such adoption is under the personal law of the person making such adoption, lawful, such child shall be deemed to be excluded from the family of the employee.
Meaning of Continuous Service
Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years. An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.
Where an employee is not in continuous service for any period of one year or six months, he shall be deemed to be in continuous service under the employer:
- if for the said period of one year he has worked for one hundred and ninety days in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week and two hundred and forty days in any other case;
- if for the said period of six months has actually worked under the employer for not less than ninety-five days in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week and one hundred and twenty days, in any other case;
- The number of days on which an employee has actually worked under an employer shall include the days on which:
In case of employees in seasonal establishments he shall be deemed to be in continuous service for any period of one year or six months if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during such period.
- he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 or under the Industrial Disputes Act, 1947 or under any other law applicab1c to the establishment;
- he has been on leave with full wages earned in the previous year;
- he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment and
- in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed twelve weeks.
Calculation of Amount of Gratuity
1.For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days wages based on the rate of wages last drawn by the employee concerned. After five years, if workers work more than 6 months but less than a year, then it is calculated as another one year. But if they work less than 6 months after five years, then it will not be considered as another year. For computing gratuity, number of working days in a month is considered 26 days. This is to done to provide benefit to the employees as it increases the amount of gratuity to be paid. The last drawn basic pay is divided by 26. The amount so obtained is multiplied by 15 to compute the amount of gratuity per year.
2.In the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment. For calculating the wages last received, the amount of wages paid for any overtime shall not considered.
3.In the case of an employee who is employed in a seasonal establishment and who is riot so employed throughout the year, the employer shall pay the gratuity at the rate of seven days wages for each season.
4.The amount of gratuity payable to an employee shall not exceed three lakhs and fifty thousand rupees.
5.For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.
6.Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.
Forfeiture of Gratuity
The gratuity of the following persons may be forfeited:
- Gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused.
- The gratuity payable to an employee may be wholly or partially forfeited:
- if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
- if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.
Exemption From Tax
The gratuity received up to the limit of Rs. 3,50,000 is liable to be exempted from taxation under the Income Tax Act. The exemption is, however, not available for payment of gratuity when the employee is still in service. Gratuity received from a previous employer is to be pooled with gratuity received from the present employer for computing exemption limit. In case of any other employee, not covered under the Act, the gratuity received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior to his retirement is exempt from tax to the extent of the least of the following:-
- Rs. 3,50,000
- Gratuity actually received, or
- Half month's salary for each completed year of service.
Time Limit for Making Payment of Gratuity Amount
1.A person eligible for payment of gratuity can himself or through his authorized person shall send a written application to the employer for payment of such gratuity.
2.As soon as gratuity becomes payable the employer shall determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the controlling authority specifying the amount gratuity so determined.
3.The employer must pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
4.If the amount of gratuity payable is not paid by the employer within the specified period, the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits, as that Government may, by notification specify. No such interest shall be payable in case the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the controlling authority for the delayed payment on this ground.
Failure to Pay Gratuity Amount
Payment of gratuity is a statutory requirement. In case an employer fails to pay gratuity amount to an employee, he shall liable for punishment. Where the employer fails to make payment of any gratuity payable to the employee, he shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to two years.
Any employer who contravenes or makes default in complying with any of the provisions of this Act or any rule or order made there under shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both.
If an employer makes any false statement or false representation in order to avoid any payment to be made by himself under the Act or of enabling any other person to avoid such payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both.
Protection of Gratuity
The gratuity amount payable shall not be liable to attachment in
execution of any decree or order of any civil, revenue or criminal court.
Remedy in Case the Employer Does Not Pay Gratuity
If the amount of gratuity is not paid by the employer within the prescribed time to the person entitled thereto, the aggrieved person should make an application to the Controlling Authority under the Payment of Gratuity Act within the area where the employer's establishment is situated or where the employee was working at the time of termination. The controlling authority shall issue a certificate for that amount to the Collector, who shall recover the same, together with compound interest thereon at such rate as the Central Government may, by notification, specify, from the date of expiry of the prescribed time, as arrears of land revenue and pay the same to the person entitled thereto.