Gratuity is a defined benefit plan and is a lump sum payment made to the employee based on the duration of total service. This benefit is payable on separation from employment on account of resignation, death, or retirement by taking the last drawn salary as the base for computing purposes. In case of the death of the employee, the surviving family members are given the amount.
A person is eligible to receive gratuity only if he has completed minimum of five years of service with an organization.
Payment of Gratuity Act, 1972 has divided non-government employees into two categories:
- Employees covered under the Act
- Employees not covered under the Act
Gratuity 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.
Suppose A’s last drawn basic pay is Rs 60,000 per month and he has worked with XYZ Ltd for 20 years and 7 months. In this case, using the formula above, gratuity will be calculated as:
(15 X 60,000 X 21)/26 = Rs. 7.26 lakh
In the above case, we have taken 21 years as tenure of service because A has worked for more than 6 months in year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into account while calculating the gratuity amount.
Gratuity for employees not covered under the Act
The amount of gratuity payable to the employee can be calculated based on half a 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
In the above mentioned example, if A’s organisation was not covered under the Act, then his gratuity will be calculated as:
(15 X 60,000 X 20) /30 = Rs 6 lakh
Here the number of years of service is taken on the basis of each completed year. So, since A has worked with the company for 20 years and 7 months, his tenure will be taken as 20 and not 21.
As per the government’s pensioners’ portal website, retirement gratuity is calculated like this: one-fourth of a month’s basic pay plus dearness allowance drawn before retirement for each completed six monthly period of a qualifying service. The retirement gratuity payable is 16 times the basic pay subject to maximum of Rs 20 lakh.
In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh.
| Qualifying service | Rate |
| Less than one year | 2 times of basic pay |
| One year or more but less than 5 years | 6 times of basic pay |
| 5 years or more but less than 11 years | 12 times of basic pay |
| 11 years or more but less than 20 years | 20 times of basic pay |
| 20 years or more | Half of emoluments (salary) for every completed 6 monthly period subject to maximum of 33 times of emoluments |
Applicability
The Payment of Gratuity Act, 1972 is applicable to every factory, mine, oilfield, plantation, port, and railway company; every shop or establishment within the meaning of any law in which ten or more persons are employed, or were employed, on any day of the preceding twelve months; such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf. The Act extends to the whole of India excluding the State of Jammu and Kashmir.
Eligibility for gratuity
An employee who has rendered at least five years of service becomes entitled to the said benefit. The pre-requisite of completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement to the extent that the person is literally unable to provide the required services. In the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.
Payment of gratuity
- The employer shall arrange to pay the amount of gratuity within 30 days from the date it becomes active i.e. from the day the person retires or his employment is terminated to the person to whom the gratuity is awarded. If the amount of gratuity payable under the section is not paid by the employer within the period specified, he will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate in coherence with the guidelines laid down by the by the Central Government.
- Section 4 of the Payment of Gratuity Act, 1972 provides the procedure for payment of gratuity to an employee. The said section contemplates that gratuity payable under the Act should be paid in cash, or if so desired by the payee, in demand draft or bank cheque to the eligible employee, nominee, or legal heir, as the case may be.
- The second provision to sub-section (1) of Section 4 of the Act, further lays down that in case of death of the employee, gratuity payable to him should be paid to his nominee or, as the case may be, to the guardian of such nominee or; if no nomination has been made, then it should be paid to his heirs.
Forfeiture of gratuity
The employer can withhold or forfeit gratuity wholly or partially even if the employee has completed 5 years if the employment of the said employee has been terminated for disorderly conduct or any other misdemeanor or an act tantamount to violence provided that such offense is committed by him in the course of his employment.
Exemption from tax
The taxability of gratuity depends on the recipient’s job. In the case of government employees, there is no tax on the gratuity. In the case of private-sector employees, the gratuity is exempt from tax subject to a maximum of Rs 10 lakhs or 15 days salary for each completed year of service
Time limit for making payment
- A person can himself, or via his authorized person send an application to the employer for payment of the desired gratuity.
- As soon as gratuity becomes payable, it is calculated by the employer.
- The employer must pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
Failure to pay gratuity amount
In case an employer fails to pay a gratuity amount to an employee, he shall be liable for punishment with imprisonment for a term which shall not be less than six months but which may extend to two years. Any employer who contravenes or makes default in complying with any of the provisions of the Act or any rule or order made thereunder shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year or with a fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both. If an employer makes any false statement or false representation in order to avoid any payment to be made by himself under the Act or of enabling any other person to avoid such payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both.
Gratuity Act Compliances
The following compliances must be ensured by an employer, under the Payment of Gratuity Act, 1972 –
- The Employer must submit a Notice in Form ‘A’ to the Controlling Authority of the area within 30 days of coming under the ambit of the Payment of Gratuity (Maharashtra) Rules, 1972 as per Rule 3 (1).
- The Employer must submit a Notice in Form ‘B’ to the Controlling Authority of the area within 30 days of any change in the name, address, employer or nature of business as per Rule 3 (2) of Payment of Gratuity (Maharashtra) Rules, 1972.
- As per Rule 4 of Payment of Gratuity (Maharashtra) Rules, 1972, the employer should display a Notice at or near the main entrance of the establishment in English and in a language understood by majority of the employees specifying the name of the name of the officer with designation, authorized by the employer to receive on his behalf the notices under Payment of Gratuity Act, 1972 and Payment of Gratuity (Maharashtra) Rules, 1972.
- A female employee willing to exclude her husband from family for the purposes of the Gratuity Act, 1972 {Section 2 (h) (ii)} should file a Notice in Form ‘D’ and send in triplicate to the employer. The employer must then record the receipt on one copy, return the copy to the employee and send the second copy to the controlling authority as prescribed under Rule 9 (1) of Payment of Gratuity (Maharashtra) Rules, 1972.
- A female employee may withdraw the Notice referred to above by giving notice in triplicate in Form ‘E’. The same procedure is to be followed as above.
- Every nomination, fresh nomination or alteration of nomination as the case may be, in various Forms F, G or H as prescribed under Rule 6 of the Payment of Gratuity (Maharashtra) Rules, 1972 should be kept in safe custody of the employer as per Section 6 (7) of Gratuity Act, 1972.
- As per Section 7 of The Gratuity Act, 1972 it is the employer’s duty to determine the amount of gratuity and give notice in writing to the person to whom gratuity is payable and also to the Controlling Authority specifying the amount of gratuity so determined
- Abstracts of the Gratuity Act, 1972 and Payment of Gratuity (Maharashtra) Rules, 1972 should be displayed in English and in the language understood by majority at a conspicuous place at or near the main entrance of the establishment as per Rule 20 of Payment of Gratuity (Maharashtra) Rules, 1972.
Penalties
- Imprisonment for 6 months or fine up to Rs. 10,000 fir avoiding to make payment by making false statement or representation
- Imprisonment not less than 3 months and up to one year with fine on default in complying with the provisions of Act or Rules
Amendments
Both the houses of the Parliament have approved the Payment of Gratuity (Amendment) Bill, 2018 (hereinafter referred to as “bill”) and enforced on March 29, 2018. The bill has brought forth the following amendments:
1. For the purpose of calculation of the period of continuous service in case of female employees the duration of maternity leaves is also included. The duration of the maternity leaves has been extended from the ‘twelve weeks’ to ‘such period as may be notified by the Central Government from time to time’.
2. The maximum limit which was earlier restricted to INR 1,000,000 has been extended to INR 2,000,000. The Government has adopted a progressive approach by incorporating changes in the Payment of Gratuity Act, 1972 through the amended bill.
The modification to maximum limit of gratuity has been introduced taking into account the inflation and wage increase after the implementation of 7th Central Pay Commission.
Forms or Registers to be maintained
| 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 |
