Gratuity Laws in India

Gratuity is a statutory benefit offered to Indian employees as financial remuneration for services rendered to a company. It is a token of appreciation given by employers to their employees, particularly for long-term service. The Gratuity Laws in India, governed by the Payment of Gratuity Act of 1972, establishes the basis for this benefit. In this article, we will look at gratuity regulations in India, eligibility requirements, how to claim gratuity, and other relevant topics.

What is Gratuity?

(Gratuity Laws in India)Gratuity is a lump sum payment provided by an employer to an employee to show appreciation for their long-term service. It is paid at the time of retirement, resignation, or termination, if the employee meets the standards outlined in the Payment of Gratuity Act of 1972.

The Payment of Gratuities Act pertains to:

• Companies or establishments having at least ten employees.
• Factories, mines, oilfields, plantations, ports, railways, and other such organisations.
• Shops or establishments as designated by the government.

The gratuity payment is necessary for eligible employees and is determined based on the employee’s latest drawing paycheck and the number of years of service with the company.

Eligibility for Gratuity in India

(Gratuity Laws in India) To be eligible for gratuity, the employee must meet specific conditions under the Payment of Gratuity Act, 1972. The following are the key eligibility criteria:

1. Completion of Five Years of Continuous Service

To qualify for a gratuity, an employee must have completed at least five years of continuous service with the same employer. However, the five-year requirement is waived in the event of death or disablement due to an accident or disease. In such instances, gratuity is paid to the deceased employee’s lawful heirs, even if the employee did not complete five years of service.

2. Employment Categories Covered

Employees working in permanent, contract, or seasonal jobs are eligible for gratuity if they meet the minimum service requirements. Temporary employees, interns, and apprentices, on the other hand, are typically ineligible unless specifically covered by business policy.

3. Retirement, resignation, or termination.

Employees who meet the service criterion are entitled for gratuity when they retire, resign, or are terminated. It is crucial to remember that termination for misbehavior or unethical behavior may result in the confiscation of a gratuity in certain instances.

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4. Death or Disability.

As previously stated, the gratuity is payable in the event of an employee’s death or disability as a result of an accident or disease, regardless of service requirement. The payments are made to the dead employee’s legal heirs or nominees.

5. Employees covered by the Act

The Payment of Gratuity Act applies to employees in a variety of sectors, including:

• Employees from both public and private sectors.
• Employees in factories, mines, oilfields, plantations, ports, railways, and other specific industries.
• Employees at stores and establishments with ten or more staff.

How is the gratuity calculated?

(Gratuity Laws in India) The gratuity is calculated using the employee’s last drew salary (basic salary and dearness allowance) and the number of years of service. The formula to calculate gratuity is as follows:
Gratuity = (last received salary × 15 × years of service) ÷ 26.

The last drawn salary comprises both basic wage and dearness allowance (DA).
15 signifies 15 days’ pay for each year of service.
The number of years of service is rounded to the nearest full year.
A month consists of 26 working days (excluding holidays and weekends).

For example, if an employee’s last received income (basic + DA) is ₹40,000 and they have completed 10 years of service, their gratuity is computed as follows:

Gratuity is calculated as (₹40,000 × 15 × 10) ÷ 26 = ₹2,30,769.23.

In this scenario, the employee is eligible to get ₹2,30,769.23 as gratuity.

Maximum Limit:

(Gratuity Laws in India) The Payment of Gratuity Act sets a maximum gratuity of ₹20 lakhs for employees. The government revises this restriction at regular intervals.

How Do I Claim Gratuity?

(Gratuity Laws in India) The procedure of claiming gratuity consists of a number of processes that both the employee and the employer must complete. The Payment of Gratuity Act establishes certain standards for claiming gratuity.

Step 1: Submitting the Application (Form I)

When an employee retires, resigns, or terminates work, they must submit a gratuity application in Form I to their employer. The application must be submitted within 30 days of your retirement or resignation. In the event of death or disability, the employee’s legal heirs or nominees may submit the application on their behalf.

Step 2: Employer’s Acknowledgement (Form L).

Upon receipt of the application, the employer must recognize it and complete the gratuity payment within 30 days. The employer must provide a written notification (Form L) detailing the amount of gratuity payable and the date of payment.

Step 3: Payment of Gratuity.

The company must pay the gratuity amount within 30 days of the employee’s departure or resignation. The payment is often made via bank transfer or check. If payment is delayed, the employer is required to pay interest on the gratuity amount from the due date until it is paid.

Step 4: Grievance Redressal (Form N)

If the employer fails to pay gratuity or disputes the amount, the employee may submit a complaint with the Controlling Authority established by the Payment of Gratuity Act. The employee must submit a written application in Form N to the Controlling Authority within 90 days of the gratuity payment’s due date.

The Controlling Authority will investigate and, if necessary, force the employer to pay the gratuity together with interest. If either party is dissatisfied with the Controlling Authority’s decision, they may appeal to the Appellate Authority.

Gratuity forfeiture

(Gratuity Laws in India) Gratuity can be forfeited whole or partially in certain situations. The Payment of Gratuity Act states that gratuities can be forfeited if:

The employee’s employment is terminated for any act of willful wrongdoing, violence, or moral turpitude.
The employee acts in a way that causes damage or loss to the employer’s property.
In such instances, the employer may lose the gratuity sum to the extent of the resulting damage.

Income Tax on Gratuities

(Gratuity Laws in India) Gratuity is subject to income tax, although its taxability is determined by whether or not the employee is covered by the Payment of Gratuity Act.

Gratuities of up to ₹20 lakhs are tax-free for employees covered by the Payment of Gratuity Act. Any sum over ₹20 lakhs is taxed according to the applicable income tax bracket.

Employees not covered by the Payment of Gratuity Act have a lower exemption level, and any gratuity paid is taxed depending on the employee’s total salary and service duration.

Conclusion

(Gratuity Laws in India) Gratuity is a significant financial advantage that gives security to employees after years of committed labor. Employees must understand their eligibility, the method for claiming gratuity, and any applicable legal conditions. Employers must also ensure that gratuities are paid on time and in accordance with the Payment of Gratuity Act requirements. Knowing these data can assist employees and employers in avoiding arguments and ensuring a smooth gratuity payment process.

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