Gratuity is that part of the salary of an Employee which he receives from his/her employer in gratitude for the services offered to the employer’s company. It is one of the retirement benefits given by the employer to the employee, leaving the job.
‘Employee’ as per ‘The Payment of Gratuity Act, 1972, means 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, semiskilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express 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 the payment of gratuity.
Five years continuous service: An employee, in order to be eligible to claim gratuity, should have worked with a particular employer for at least five years ( as per Section 10(10) of the Income Tax Act).
Section 2A of the Gratuity Act, states that ‘continuous period’ shall also include the following:
If the employee is not in continuous service of one year, he/she shall be deemed to be in continuous service of one year if- he/she has, in immediately preceding twelve calendar months, worked under the employer for not less than:
If the employee is not in continuous service of six months, he/she shall be deemed to be in continuous service of six months if- he/she has, immediately preceding six calendar months, worked under the employer for not less than:
If an employee of seasonal establishment is not in continuous service of twelve or six months, he/she shall be deemed to be in continuous service of twelve or six months; if he/she actually worked for not less than seventy five percent of the number of days on which the establishment was in operation during such period.
By continuous service for the purpose of gratuity, it is meant uninterrupted service which may be interrupted due to accident, sickness, absence for duty without any leave, leave, lay-off, lock-out, strike or cessation of work (due to not any fault of the employee) are considered as continuous service.
Following days shall also be included while calculating the actual days of an employee has worked for:
Generally, every factory and establishment pays gratuity to its employees for the services rendered to it. However, the gratuity rules do not mandatorily apply to entities which have less than 10 persons and the number of employees for this purpose are counted as an average of the last 12 months.
The employer may even forfeit the gratuity to which an employee may be entitled to if he leaves his job after 5 years, if the company suffers any loss on account of the employees fault or negligence.
Calculation of gratuity depends upon two variables:
In calculating the gratuity, fifteen days salary is given for every completed year and as the number of working days in a month is considered to be 26 only (excluding the Sundays), the formula for calculating the gratuity would be:
Formula: Last drawn salary x 15/26 x Completed years of Service (including a part of year in excess of six months)
In case of an employee working in a seasonal establishment, he shall be paid gratuity at the rate of 7 days wages for each season.
If a worker or employee becomes disabled due to a disease or an accident and, as a result, is not able to perform the task which he/she was performing prior to such disability, however, is re-employed on some other task/job on reduced wages, he/she shall be paid gratuity as follows:
There are two ways an employer may pay gratuity to his/her employee, either from his own funds, or he may approach a life insurer to purchase a group gratuity plan. When an employer opts for the latter, he has to pay annual contributions as decided by the insurer. However, the employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Gratuity is not entitled to any exemption from tax. When an employee receives gratuity it would be taxable under the head ‘Income from salary’. When the employee is entitled to gratuity on account of his death, it would fall in the hands of his/her nominee and would be charged under the head ‘Income from other sources’.
For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories
Gratuity offered to an employee is exempted from being attached in case of a decree against the employee as from a Civil or a Criminal Court, as a decretal amount or fine, as the case may be.
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