Gratuity is lump sum payment made by an employer to an employee in consideration of his past service when the employment is terminated. It is paid for long and meritorious services rendered by an employee. With enactment of Payment of Gratuity Act, 1972, gratuity payment has become mandatory and in case of non-application of gratuity Act, the employee can claim gratuity under terms of contract of employment.
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).
Meaning of Continuous service: – According to section 2A, for purposes of Act
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.
Section 2A of the Gratuity Act, states that ‘continuous period’ shall also include the following:
1. If in case 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:
2. If in case 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:
3. 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.
Generally every factory and establishment pays gratuity to its employees for the services rendered to it. However the gratuity rules does not mandatorily applies to such 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.
Applicable once, continuous to be governed by PGA 1972:- It is applicable even after the number of persons employed has fallen below ten.
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.
On leaving the job: One of the occasions when an employee is entitled to claim gratuity is on the termination of his employment. There can be many reasons for this such as retirement/voluntary retirement, resignation, sometimes the employer may terminate the employee (not for some bad conduct of the employee as in this case the employee may lose his chance of claiming gratuity) or sometimes the employee may find some better opportunity so he might opt for a job-switch.
Death or permanent disablement: The other circumstance where an employee can claim gratuity is in case of his/her death or disablement which renders him permanently incapable of working in that company forever. However in such cases the Income Tax has relaxed the five years criteria, therefore an employee can claim his/her gratuity even if he/she has worked for less than five years. In case of death the nominees of the employee is given the gratuity. If case of the nominee being a minor, the amount of gratuity shall be deposited with the controlling authority. Controlling authority deposit/invest the gratuity amount in a financial institution or bank for benefit of minor, as may be prescribed, until such minor attains majority.
To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:
a) Employees covered under the Act
b) Employees not covered under the Act
a) For employees covered under the Act
There is a formula using which the amount of gratuity payable is calculated. The formula is based on the 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.
The formula is as follows: (15 X last drawn salary X tenure of working) divided by 26
Here, last drawn salary means basic salary, dearness allowance and commission received on sales.
b)For employees not covered under the Act
There is no law that restricts an employer from paying gratuity to his employees even if the organisation is not covered under the Act.
The amount of gratuity payable to the employee can be calculated based on half month's salary for each completed year. Here also salary is inclusive of basic, dearness allowance, and commission based on sales.
The formula is as follows: (15 X last drawn salary X tenure of working) divided by 30
The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons. The main purpose for enacting this Act is to provide social security to workman after retirement, whether retirement is a result of superannuation, or physical disablement or impairment of vital part of the body. Therefore, the Payment of Gratuity Act, 1972 is an important social security legislation to wage earning population in industries, factories and establishments.
Earlier, the upper ceiling on gratuity amount under the Act was Rs. 10 Lakh. The provisions for Central Government employees under Central Civil Services (Pension) Rules, 1972 with regard to gratuity are also similar. Before implementation of 7th Central Pay Commission, the ceiling under CCS (Pension) Rules, 1972 was Rs. 10 Lakh. However, with implementation of 7th Central Pay Commission, in case of Government servants, the ceiling has been raised to Rs. 20 Lakh
Therefore, considering the inflation and wage increase even in case of employees engaged in private sector, this Government decided that the entitlement of gratuity should also be revised in respect of employees who are covered under the Payment of Gratuity Act, 1972. Accordingly, the Government initiated the process for amendment to Payment of Gratuity Act, 1972 to increase the maximum limit of gratuity to such amount as may be notified by the Central Government from time to time. Now, the Government has issued the notification specifying the maximum limit to Rs. 20 Lakh.
Gratuity can be forfeited {Sec 4(6)} Where an employee has been terminated :
