Gratuity is the lump sum amount paid to the employee by his employer as mark of recognisition of his service when he retires or leaves service. In this article I have explained all the concepts related to gratuity which will help the readers in gratuity calculation, its payment and taxability.
I have explained all concepts in question answers format.
Which law governs the payment of gratuity in India?
Gratuity in India is governed by Payment of Gratuity Act, 1972. The act is amended is time to time to bring changes in it. Recently the act was amended by Payment of Gratuity(Amendment) Act, 2010 with effect from 24th May 2010.
What are the organizations in which Gratuity Act is applicable?
As per section 1(3), the act applies to:
- Every factory, oilfield, mine, port, plantation and railway company;
- Every shop* or establishment* having 10 or more persons as employee on any day of the preceding 12 months.
- Any other establishment or class of establishment which is notified* by the central government having 10 or more persons as employee on any day of the preceding 12 months.
*The shop or establishment specified in point two above is per the law applicable in the state in which such shop or establishment is present. Please note that companies formed under companies Act, 2013 are covered in the meaning of shop or establishment.
*The notified establishment stated in point no. 3 are:
- Motor transport undertakings
- Chambers of Commerce and Industry
- Inland Water Transport establishment
- Solicitors officers
- Local bodies
- Educational Institutions
- Circus Industry
Does the Gratuity Act still apply, if number of employee falls below 10?
A shop or establishment in which the Gratuity Act once becomes applicable, continues to govern by it, even if the number of employees at any time after falls below 10.
Who is an employee as per Gratuity Act?
Employee means any person who is employed for wages. It does not include apprentice (Trainee).
Note: Teachers are also covered in the meaning of employee.
What is the ceiling limit for Gratuity payment?
There is no ceiling limit for Gratuity payment. Earlier there was a limit of Rs. 3500, which is now removed with effect from 24th May 1994. So every employee covered under this act.
When is Gratuity payable?
Gratuity is payable on termination of employment after the employee has rendered continuous service* for not less than 5 years.
The termination of service may of the following reasons:
- Superannuation : Retirement with pension
- Retirement or resignation
- Death or disablement due to accident or disease
What is “Continuous Service” under Gratuity Act?
The act requires that a person should be in continuous service (employment) for a period of 5 Years.
The continuous service means a period of uninterrupted service. However the interruption due to following reasons will not affect continuous service:
- Absense from duty without leave (break in service passed by orders or law has been excluded)
- Lock out
- Cession of work not due to default of employee
The act also provides the following two situations, where employee shall be deemed to be in continuous service if he could not complete 5 years.
If the employee during the period of 12 months preceding the date of calculation has worked not less than:
- 190 days for employees working in mines (below ground) or in an establishment which works less than 6 days in a week.
- 240 days for all other establishments
Example: If Mr. A has worked for 4 years and 240 days, then it be deemed as he has completed 5 years.
If the employee during the period of 6 months preceding the date of calculation has worked not less than:
- 95 days for employees working in mines (below ground) or in an establishment which works less than 6 days in a week.
- 120 days for all other establishments
Example: If Mr. A has worked for 4 years and 6 months and at least completed 120 days in the last six months, then he will be deemed to have completed 5 years.
Case Law on Five year of service
In a case, Madras High Court held that if an employee rendering the continuous service of 240 days in a the fifth year, he will be deemed to have continued the service for one year as given in section 2A of the Gratuity Act.
Mettur Beardsell Ltd. v. Region Labour Commissioner , Madras, 1998 LLR 1072 (Mad HC).
To whom is Gratuity payable?
Gratuity is paid to the employee himself. However in case of death of employee, it shall be paid to his nominee. If no nomination is made, then paid to legal heirs.
How Gratuity is calculated?
Gratuity is payable for every completed years or part in excess of six months at the rate of 15 days Salary last drawn
The formula for gratuity calculation is:
Monthly Salary X 15/26 X Number of years
Monthly salary is Basic salary and Dearness allowances
Number of years completed years or part in excess of six months. For example if it is 7 years and 8 months, then it will be taken as 8 years for calculation.
The Maximum gratuity allowable under the Gratuity Act is Rs. 10 Lakh.
Can Gratuity be forfeited by an employer?
Gratuity can be retained by an employer to the extent of damage done by the employee to the property of establishment. This could only be done when there is sufficient proof of such damage.
As per section 4(6)(b) in the following cases also the gratuity of employee may be forfeited.
- for riotous and disorderly conduct or any other act of violence on his part, or
- for any act which constitutes an offence involving moral turpitude provided that such offence is committed by him in the course of his employment.
How to calculate tax on payment of Gratuity?
Gratuity received by government employees at the time of death or retirement, is fully exempted.
Gratuity received by employees covered under payment of gratuity act, 1972, gratuity is exempted to the least of the following:
- Rs. 10 Lac
- 15 days salary (out of 26 days) based on last drawn salary for each completed year of service or part thereof in excess of 6 months; or
- Gratuity actually received
Here salary means basic salary and dearness allowance
In case of any other employees, the gratuity is exempted to the least of the following:
- Rs. 10 Lakh
- Half month’s salary (on the basis of last 10 month average salary immediately preceding the month in which any such event occurs) of each completed years (fraction to be ignored)
- Gratuity actually received
Here salary means basic salary, dearness allowance if provided in terms of employment and commission as percentage of turnover achieved by the employee.
How to register under gratuity Act, 1972?
There is no separate registration procedure apply for gratuity registration. Once the number of employees exceeds 10, it automatically applies to the establishment.
The government has provided Form A under Rule 3(1) which is required to be submitted within 30 days of opening of branch.
What are the various other forms under Gratuity Act, 1972?
The various forms under Gratuity are as follows:
|Form No.||Ref. to Statute||Description||Due date to be submitted to|
|Form ‘A’||Rule 3(1)||Notice of opening||Within 30 days of opening of the branch|
|Form ‘B’||Rule 3(2)||Notice of closure||Within 30 days of closing of the branch|
|Form ‘F’||Rule 6(1)||Declaration of Nomination||Within 30 days from the date of joining of the employee|
|Form ‘I’||Rule 7(1)||Application for Gratuity by an employee||After completion of 5 and more years|
|Form ‘J’||Rule 7(2)||Application for Gratuity by a Nominee||After the death of the employee|
|Form ‘K’||Rule 7(3)||Application for Gratuity by a legal Heir|
Can gratuity be adjusted against loans outstanding against an employee?
No. Gratutiy, as applicable by an employer as payable by an employer to an employee or his legal hier can’t be adjusted against the loan as extended to the deceased employee.
Yada Laxmi v. A. P. State Co-operative Bank, Hyderabad, 2006 (108) FLR 1178: 2006 LLR 451 (AP HC).
Can Notice Pay deducted from Gratuity?
No. An employer can’t be permitted to recover the amount towards notice pay from the gratuity payable to an employee.
Amar Kumar Halder v. Sarwati Press Limited 2013 LLR 774: 2013 (137) FLR 666 (Cal HC).
Can Gratuity of an employee be attached in a decree by the civil court?
No it can’t be attached. Even where the gratuity is payable under a scheme it squarely come the preview of payment of Gratuity act, 1972 and therefore the immunity of section 13 of the act available.
Calcutta Dock Labour Board v. Sandhya Mitra, 1985 Lab IC 714: AIR 1985 SC 996 :1985 (I) LLN 767:1985 (50) FLR 332.
How to calculate gratuity if an employee only works for 20 days in a month?
As per gratuity Act, it is irrelevant whether the employee work 20 or 22 days. The gratuity will be calculated as if an employee is working for 26 days in a month.
May and Baker (I) Ltd. Bombay v. J.S. Cutinho, National Union of Commercial Employees, 1991 LLR 375 (Bom HC)
Is it mandatory to display notice in the establishment under Gratuity Act ?
As per rule 4(1), it is statutory requirement to display notice conspicuously at or near the main entrance of the establishment in bold letters in English and in language understood by majority of employees specifying the name of the officer with designation authorized to receive notices under the Act or Rules.
Please comment for any query on Gratuity Calculation.
Latest posts by CA Harish Negi (see all)
- How to download balance sheet of a company ? - February 20, 2017
- Which company requires XBRL filing? - February 19, 2017
- How to invest in shares online: Stock Market trading Simplified - January 12, 2017