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Gratuity – Important Points to Know About the Gratuity

Legislations in India can be overwhelmingly confusing. Whenever you search on Google, the heavy flow of information from all corners can be frustrating. Amidst this, finding the appropriate information is a mammoth of a task. Hence, this blog has been drafted for all the people who have been looking for authentic and valuable information about Gratuity in India. Before moving to the important aspects associated with gratuity, it is important to understand what the meaning of gratuity is.

In India gratuity is a kind of retirement benefit. In layman’s language gratuity is a lump sum amount of money paid by an employer to an employee when that employee leaves an organization. It is given for the services rendered by the employee during his/her period of employment. In India, the rules and regulations around gratuity are laid out in the Payment of Gratuity Act, 1972. Amendments are made to this act from time to time.

Some of the important gratuity terms are laid out in details below for your in-depth understanding.

Applicability

To be eligible to receive gratuity an employee must complete a minimum of 5 years of service with the current employer. However, in the case of the employee’s demise before completion of 5 years or in case the employee becomes disabled as a result of an illness or an accident, the employer must pay gratuity.

The Gratuity Act applies to the employees of mines, plantations, oilfields, factories, railway companies, ports and other establishments having 10 or more employees. Gratuity is completely paid by the employer, and no part of it comes from the employee’s salary.

Gratuity is payable when an employee is eligible for superannuation, an employee resigns, an employee retires, or when an employee passes away or becomes disabled as a result of an illness or accident. In case of an employee’s death, the amount of gratuity is paid to the employee’s nominee, or to the employee’s legal heir.

Gratuity Calculation Formula

In India Gratuity is calculated using the following formula

Gratuity= Last Drawn Salary x 15/26 x No. of years of service

Notes:

Last Drawn Salary = the Basic Salary + Dearness Allowance

The Ratio 15/26 denotes 15 working days out of 26 working days of a month.

Years of service are rounded to the closest full year of service. For example, if an employee’s period of service is 10 years, 10 months and 13 days, then 11 years will be factored in for the calculation of the gratuity amount.

Forfeiture

An employee’s gratuity amount can be forfeited as per the gratuity act in the following cases.

  • If the service of employees has been terminated because of any act on his or her part that establishes an offense involving moral turpitude. However, such offense must be conducted during the course of his/her employment.
  • If the service of an employee has been terminated as a result of the employee’s disorderly or lawless conduct or any other act that amounts to violence on the employee’s part.

If an employer must forfeit an employee’s gratuity, then a termination order comprising the established charges pertaining to any of the above-mentioned misconducts must be issued. In the absence of such a termination order stating any of the aforementioned allegations, an employer cannot forfeit an employee’s gratuity.

Payment

The employer is liable to pay an employee’s gratuity amount within 30 days from the date on which the employee has billed their gratuity amount to the employer. If the employer fails to pay the gratuity amount within the specified period, then the employer has to pay simple interest on the gratuity amount due from the date on which the gratuity amount becomes payable. The rate of simple interest cannot exceed the rates stipulated by the central government at any given point of time. Gratuity is usually paid in cash. It can also be paid through a bank check or by a demand draft. Gratuity is payable to the employee, the employee’s legal heir or nominee as applicable.

Tax Exemption

Gratuity received is tax exempt to the amount that doesn’t exceed the half month salary (15 days salary) of each complete year of service calculated based on the last drawn salary. This is subject to a maximum amount of Rs.30 Lakhs. This upper limit is applicable irrespective of the number of employers paying gratuity in the same or different years.

Through the Payment of Gratuity (Amendment) Act 2018 the government has raised the tax-free gratuity limit from Rs.20 Lakhs to Rs. 30 Lakhs in 2019.  The gratuity that is paid by the government to the government employees is fully tax exempt.

Protected Against Liabilities

As per the Gratuity Act, no court of law can attach an employee’s gratuity amount to any of the employee’s liabilities. This is applicable whether there is a decree against the employee in the criminal court or the civil court. Gratuity amount is always protected against liabilities.

This blog has been created with the intent to share the comprehensive gratuity knowledge in a nutshell. Hopefully, it has given you the requisite insight into all the aspects associated with gratuity in India. Knowing Gratuity rules is a financial advantage that you can leverage well whether you are an employer or an employee. If you want to dig deeper, you can choose to read the Payment of Gratuity Act 1972 in length.