What is Gratuity?
Gratuity in an organizational perspective is a reward given beyond the obligation, to the employees for the service rendered to the organization at the time of resignation or retirement. For the amount being paid as Gratuity, employee must have worked in the organization for more than 5 years and not less than 240 days in a year.
Why & When is Gratuity paid?
Gratuity payment is made by the employer as a mark of gratification for the service rendered by employee to the company thus also acts as an incentive which motivates the employee. Usually, it is paid to the employee at the time of retirement or at the time of resignation after completing a continuous service with the company.
Who contributes to the gratuity fund?
The employer has to contribute to the gratuity fund.
Eligibility for receiving Gratuity
An employee is eligible for receiving gratuity payment only after he has completed 5 years of continuous service.
What is continuous service?
An employee’s service is said to be continuous when the employee has provided an uninterrupted in that period including the service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, layoff, strike or lockout of cessation of work not due to any fault of the employee.
Who controls authority?
The appropriate Government may, appoints an officer as a controlling authority, who shall be responsible for the administration of this Act and different controlling authorities may be appointed for different areas.
Payment of Gratuity
Gratuity shall be payable to an employee on the termination of his employment after rendering continuous service for not less than five year, at the time of superannuation, at the time of retirement or resignation/Death or disablement of employee
Power to exempt
The government may exempt any establishment or employee from the act, when the employees in such establishment are in receipt of pensioner benefits not less favorable than the benefits conferred under this act.
Nomination:
- Each employee who has completed one year of service shall nominate a person in prescribed manner.
- Also an employee can nominate more than one nominee and distribute the amount of gratuity payable.
- At the time of making nomination, if the employee has a family, the nomination made must be in favor of the one or more family members.
- After nominating any person (in case of no family), if the employee acquires a family, such nomination which was made become invalid and the employee shall make a fresh nomination in favor of one or more family members in prescribed manner.
Determination of Gratuity:
- A person who is eligible for payment of gratuity under this act has to apply in writing, to the employer in the prescribed manner for payment of such gratuity.
- As soon as gratuity becomes payable, the employer shall determine the amount of gratuity and send a notice in writing to the person to whom gratuity is payable and also to the controlling authority.
- Within a period of 30 days from the date it becomes payable, employer shall arrange to make a payment of gratuity to the concerned person.
- After settling the disputes (if any) and after a due inquiry, the controlling authority shall pay the amount deposited by employer to the person entitled.
Recovery of Gratuity:
The employee may apply to the controlling authority in case the employer fails to pay the amount payable within the prescribed time. The controlling authority on behalf of the applicant issue a certificate for that amount to the collector who shall recover the same together with the compound interest and pay the same to the person entitled to.
Before issuing such certificate, the controlling authority has to give the employer a reasonable opportunity for showing cause against the issue of such certificate and the interest payable shall in no case exceed the amount of gratuity payable.
Penalties:
The evasion of paying gratuity to the person entitled to is punishable with imprisonment up to six months or with fine up to Rs. 10,000/- or both.
How is Gratuity calculated?
If the years of service is above 5 years and less than 10 years,
- Gratuity = Last drawn Salary x 15 x No. of Years of service / 26
If the service is above 10 years and less than 20 years,
- Gratuity = Last drawn Salary x 22 x No. of Years of service / 26
If the years of service is above 20 years,
- Gratuity = Last drawn Salary x No. of Years of service
where, Salary = Basic + Dearness Allowance (DA)
How to determine years of service?
The fractions of the years are considered while calculating the years of service provided it cross 6 months.
For example, an employee is retiring from the service after rendering the service for 25 years 7 months and 25 days. For calculation of years of service, 26 years are considered.
Maximum amount of gratuity payable
Employer is bound to pay 15 days’ salary for each year of service rendered by the employee subject to a maximum of Rs.10 Lakh
Tax treatment of Gratuity
The gratuity amount received by an employee under the Payment of Gratuity Act, 1972, is exempted from tax to the extent of least of the following:
- 15 days salary (7 days for employees of seasonal establishment) based on salary last drawn for every completed year of service. Part of the year in excess of six months is treated as a completed year.
- Rs.10,00,000
- Gratuity actually received.
Gratuity in excess of the above limits is taxable in the hands of the assessee.
In cases where the employee is governed neither by the specified Rules nor by the Payment of Gratuity Act, what would be the taxable amount of gratuity?
In such a case, the gratuity received is exempted to the extent of least of the following:
- Rs.10,00,000
- Half month’s salary for each completed year of service
- Gratuity actually received
Is the gratuity received while in service is exempted?
Any gratuity paid to an employee while in service is not exempt from tax. It is exempted only on retirement, termination of employment and resignation or death.
If gratuity is received from more than one employer in the same year, what will be the ceiling?
The Ceiling of Rs.10,00,000 would apply to aggregate of gratuity from one or more employers in the same year in case of retirement or death etc.
If the gratuity is received from different employers in different years will the ceiling be different?
No. The ceiling will still be Rs. 10 lakh
