The Payment of Gratuity Act, 1972 is a significant legal framework that mandates employers to provide gratuity to their employees as a form of gratitude for the services they have rendered. The act extends its coverage to employees working in mines, oilfields, railways, factories, ports, and various establishments such as shops. It ensures that employees receive a financial reward for their long-term association with an organization.
Passed by the Indian Parliament on August 21, 1972, the Payment of Gratuity Act came into effect on September 16, 1972. The act is a vital part of labor welfare legislation aimed at ensuring the financial security of employees.
Gratuity is a lump sum amount that an employer pays to their employee as a token of appreciation for the services rendered by the latter. It is typically paid when an employee retires or leaves the organization after serving for a specified period. Employers have two options to pay gratuity:
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As per the Payment of Gratuity Act 1972, any organization that employs 10 or more individuals is liable to pay gratuity to its employees. Even if the number of employees falls below 10 after a business comes under the purview of this act, the employer is still legally bound to pay gratuity.
To be eligible for gratuity under the act, an employee (whether full-time, contractual, or temporary) must complete at least five continuous years of service with the organization. However, there are exceptions:
In this context, a “year” is defined as 240 working days for employees in institutions not involving underground work and 190 days for those working underground, such as in mines.
Employees are required to nominate someone to receive their gratuity in the unfortunate event of their death. The nomination process must be completed within 30 days of completing one year of service with the organization.
Gratuity becomes payable under the following circumstances:
Gratuity is calculated based on an employee’s last drawn salary and the number of years served. There are two methods for calculation, depending on whether the employee is covered under the Payment of Gratuity Act or not.
If an organization employs at least 10 individuals on a single day in the preceding 12 months, it falls under the purview of the act. The formula used for gratuity calculation in such cases is:
Gratuity = 15 last drawn salary (basic + DA) number of service / 26
If an employee worked for 31 years with a last drawn salary of ₹85,000 the gratuity would be:
Gratuity = 15 85,000 31 / 26 = ₹15,20,192
For organizations not covered under the act, the formula for gratuity calculation is:
Gratuity = 15 average salary for the last 10 months (basic + DA + commission) number of years employed / 30
If an employee worked for 26 years and 6 months, with an average salary of ₹65,425, the gratuity would be:
Gratuity = 15 65,425 26 / 30 = ₹8,50,525
Online gratuity calculators can make this process simpler and more accurate.
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Gratuity payments are subject to income tax based on specific limits:
Gratuity paid to a widow or legal heir due to the employee’s demise is exempt from taxation.
Employers can deny gratuity if an employee is terminated for:
However, gratuity cannot be withheld due to an employee’s bankruptcy.
The Payment of Gratuity Act, of 1972 is a crucial piece of legislation that safeguards the financial well-being of employees by ensuring a lump sum gratuity payment at the end of their service. Whether you are an employee or employer, understanding the intricacies of the act is essential for compliance and financial planning.
An employee who has at least 5 completed year of service with an organization is eligible for gratuity. The five-year rule is waived in cases of death or disability.
Gratuity is tax-exempt up to ₹20 lakh. Any gratuity amount exceeding this limit is taxable.
An employer can deny gratuity if the employee is terminated for offenses involving moral turpitude or riotous behavior.
An organization must have at least 10 employees to be covered under the Payment of Gratuity Act, 1972. Even if the employee count drops below 10, the act continues to apply.
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