Gratuity is a lump sum financial benefit paid by an employer to an employee as a token of appreciation for long-term service. In India, this concept of post-employment compensation finds legal backing under the Payment of Gratuity Act, 1972. This legislation ensures that employees receive a fair reward upon retirement, resignation, or death (payable to legal heirs), provided they meet certain conditions.
In this article, we delve into the definition of gratuity, explore the scope of the Payment of Gratuity Act, 1972, and highlight its key features in an engaging and easy-to-understand manner.
What is Gratuity?
Employers provide gratuity as a monetary benefit to employees who complete a specified period of continuous service in the organization. It acts as a gesture of goodwill from employers, recognizing the employee’s loyalty and dedication.
The Payment of Gratuity Act, 1972 defines gratuity as a payment made by an employer to an employee upon the termination of his employment after five or more years of continuous service, due to:
- Superannuation (retirement),
- Resignation,
- Death or disablement due to accident or disease.
In the case of death or disablement, the condition of continuous service for five years is waived off.
Applicability of the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 applies to:
- All factories, mines, oilfields, plantations, ports, and railway companies.
- The Payment of Gratuity Act applies to every shop or establishment that employs, or has employed, 10 or more employees on any day in the preceding 12 months.
- Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 10.
This wide applicability ensures coverage for a large section of the Indian workforce, including both public and private sectors.
Salient Features of the Payment of Gratuity Act, 1972
Eligibility Criteria
An employee becomes eligible for gratuity under the Payment of Gratuity Act, 1972 when:
- They have completed at least five years of continuous service.
- The termination of service is due to retirement, resignation, death, or disablement.
The condition of five years is not required in case of death or permanent disablement.
Calculation of Gratuity
Employers calculate gratuity based on the employee’s last drawn salary and the number of years of service.
Formula:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) ÷ 26
- Last drawn salary includes basic pay + dearness allowance.
- The factor 15 represents 15 days of wages.
- 26 represents the number of working days in a month.
Example:
If an employee has worked for 10 years and their last drawn salary is ₹30,000:
Gratuity = (30,000 × 15 × 10) ÷ 26 = ₹1,73,077 (approx.)
Maximum Gratuity Limit
As per the latest amendment, the maximum gratuity payable under the Payment of Gratuity Act, 1972 is ₹20 lakhs. This limit may change based on government notifications and wage revisions.
Nomination
Employees are required to nominate a beneficiary to receive the gratuity amount in the event of their death. The employer maintains the nomination records.
- The employee must make a nomination within one year after completing their first year of service.
- If the nominee dies, the employee must submit a fresh nomination.
Time Limit for Payment
Once gratuity becomes payable, the employer must pay it within 30 days. If delayed, the employer is liable to pay simple interest on the amount from the due date till the date of actual payment.
Forfeiture of Gratuity
Gratuity can be wholly or partially forfeited if the employee:
- The employer can terminate an employee for willful omission or negligence that causes a loss to the organization.
- The employer may dismiss an employee for moral turpitude, riotous behavior, or disorderly conduct.
However, the employer must follow proper legal procedure before denying gratuity.
Taxability of Gratuity
Under Section 10(10) of the Income Tax Act, gratuity received by an employee is tax-exempt up to ₹20 lakhs for government employees and eligible non-government employees covered under the Payment of Gratuity Act, 1972.
For employees not covered under the Act, the tax exemption limit is ₹10 lakhs, subject to conditions.
Protection Against Attachment
Gratuity payable under the Payment of Gratuity Act, 1972 cannot be attached in execution of any decree or court order. This protection ensures financial security for the employee or their legal heirs.
Dispute Resolution
Any disputes regarding the amount, eligibility, or delay in payment can be referred to the Controlling Authority appointed under the Act. The authority conducts inquiries and has the power to enforce payment.
Recent Amendments
Recent changes in the law have brought several improvements:
- Increase in maximum gratuity limit from ₹10 lakhs to ₹20 lakhs.
- Extension to contractual employees in some cases.
- Inclusion of fixed-term employees, allowing them to receive gratuity even if employed for less than five years (if the term ends naturally and is one year or more).
Importance of the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 serves as a social security tool for employees. It promotes long-term employment and motivates employees to stay committed to an organization. The Act ensures a dignified exit from employment by rewarding employees for their hard work and dedication.
Moreover, it creates a legal obligation on employers to honor financial dues, thereby reducing exploitation in the workplace.
