Eligibility for Gratuity and its calculation

There are various payable components given to an employee as a part of their salary during and after their services to their respective organizations. One of those components is Gratuity. Most of the time, gratuity is often been correlated or misunderstood with a pension. However, there is a huge difference between the two. Gratuity is essentially a one time, lump-sum retirement benefit plan bestowed to the employees so as to reward them for their contribution to the enterprise. Gratuity payment in India is regulated by the Payment of Gratuity Act 1972 and is usually payable at retirement, death or resignation. In this article, we shall touch upon the various provisions of Gratuity including its calculation.

Applicability

The payment of the Gratuity Act shall be applicable to the whole of India except the state of Jammu & Kashmir and to the following class/category of entities.

1. Every factory, mine, oilfield, plantation, port, and a railway company
2. Every shop and establishment in which 10 or more persons are/were employed in preceding the last 12 months.
3. Other establishments where 10 or more persons are/were employed in the preceding 12 months.
4. Any organization/entity/enterprise/company or class of them, that Central government from time to time may notify in official gazette.

One key takeaway from the above points is that the act shall be applicable to any company which has had a working staff of 10 or more persons at any point of time in preceding 10 months, and the applicability shall not dissolve if the number later reduce down to less than 10 in remaining part of the year.

Eligibility:

Since gratuity is a kind of gratitude extended to employees, the tenure of an employee plays a major part for him to be eligible for it.

1. The employee must render to the organization his continuous service.
2. The tenure of the continuous service must be at least 5 years or more.

To understand the literal meaning of this provision, It is important to understand the rationale of Continuous service. An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.

Calculation of Gratuity

The amount of gratuity is basically a multiplication of the set number of working days out of a total of 26 working days, with two identifiers namely:

1. Last drawn salary &
2. Number of years of service.

The set number of working days decided for the calculation is 15, which means:

Amount of Gratuity = Last drawn salary X 15/26 X No. of years of service.

Note 1: Last drawn salary must be an accumulation of Basic Salary and dearness allowance only, keeping aside rest of the salary components.

Note 2: Years of service must be rounded off to nearest full year.

Note 3: in case of an employee working on daily wages, the amount of wages only shall be calculated for gratuity computation.

Note 4: In case of disablement, the salary/wages of an employee for the period prior to his disablement shall be taken to be wages received by him during that period and his wages/salary for the period ahead of his disablement shall be taken to be reduced wages.

When does the Gratuity actually become payable- The process, time limit and payment

For the payment of gratuity, an employer is entitled to calculate, notify and pay the employee. However, the employee may also contribute to his gratuity but he is not statutorily bound to do that. The following procedure for claiming gratuity has to be followed:

1. The employee has to himself, or though his authorised person, apply to employer for the payment of gratuity.

2. Upon satisfaction of all the conditions stipulated in the act, the employer has to calculate the gratuity and intimate the employee about the same along with the controlling authority with duly stipulating the amount so calculated.

3. The gratuity has then to be paid within 30 days from the date of gratuity becoming applicable to the eligible person.

4. In case of non-payment, the employer shall be eligible to pay simple interest at a rate determined by the government from time to time for repayment of long term deposits. In case of failure to pay the gratuity amount, the employer shall be punishable with imprisonment for not less than six months extendable to 2 years.

Tax Exemptions

The government has allowed zero taxon gratuity for central government employees. The same is unfortunately not the case with private-sector employees. However, the gratuity amount in the case of Private employees is eligible for exemption up to 10 lakhs or 15 days salary for each completed year of service.

Recently in March 2017, initiatives to increase the tax exemption limit by the Ministry of Labour and representative of state governments have been surfacing. The tax exemption limit is touted to be increased to 20 lakhs. Also under the current Gratuity payment rules, where employers are not covered under the gratuity Payment Act, then a minimum of Rs 10 lakh; or actual gratuity received or half month’s salary for each completed year of service – is exempted from tax. This may change once the Act is amended.

Recent proposals & discussions with respect to Gratuity taken by Government

In February 2017, the Central government along with labor ministry has allowed withdrawal of gratuity up to 20 lakhs, prior to which the tax-free withdraw ceiling was limited to 10 Lakhs. The amendment, however, is currently applicable to Government employees. This has been a major skip at the government and it is now gearing up to include private sector under its ambit too. This will be done as a part of a formal amendment in the Payment of Gratuity Act 1972. The government is also pondering over reducing the tenure of continuous service, which is currently 5 years.