Payment of Gratuity Act, 1972

.
The Payment of Gratuity Act is a genre of various statutes like the
Minimum Wages Act, Employment and Social Policy, etc. which is an
extension of labour laws and it lays down the minimum benefits to be
provided to the employees. It is a social security enactment providing
for the welfare benefits of the employees working in industries,
companies and organisations
Applicability
The Payment of Gratuity Act of 1972 applies to the establishments and entities
that have employed 10 or more individuals as employees. However, it is
essential that an employee completes a minimum of 5 years in the relevant
organization in order to claim the gratuity amount.

Objectives of the Act

The Payment of Gratuity Act,1972 was enacted with sole objective of providing
gratuity i.e.,

A monetary award given for services rendered to the employees working in the
factories, oilfields, mines, plantations, railway companies, shops or other
establishments upon their superannuation (e.g., old age retirement
amount,etc.), retirement, resignation, death or disablement.
❑ According to this Act, the continuous service means an
uninterrupted service during the employment period. This includes the
leave due to sickness, accident, lay off, strike, etc. If the interruption is
of six months or one year, then the employee is not entitled to gratuity
benefits.

❑ He/She should have worked for at least 190 days in mine or

coalfield like establishment(where duration of work is only for 6
months) and 240 days in other areas.

❑ An employee is entitled for the payment of gratuity if he/she has

rendered five years of continuous service on his superannuation,
retirement, resignation, death, disablement.

❑ However, the five years of continuous service is not mandatory in

the case where the termination is due to death or disablement. A
retired person is also entitled to gratuity amount along with his
pension.
Points to Consider
⚫ Once an employee becomes eligible to receive a gratuity, he can apply
within 30 days from the date it becomes payable. However, if you are retiring
from a job which is known to you earlier, then such form is to be given 30
days before such date. You have to use the Form I for this purpose.
⚫ Any Form For Claiming Gratuity Submitted After Due Dates Specified Above
Can Be Accepted If Employee Give Adequate Reason For Delay.
⚫ In case of the death of an employee, the nominee can apply for gratuity in
Form J within 30 days of being payable.
⚫ In case of the death of an employee, and there is no mination to gratuity, then
legal heir may apply in Form H within 30 Days of being payable.
⚫ Gratuity has to be paid within 30 days from the date it is payable to the
person. If it is not paid within 30 days, the company has to pay simple
interest from the date of eligibility till the date of actual payment.
Cont..
⚫ Once you have completed one year of service, then you have to make a
nomination within 30 days from the date of completion of one year service.
⚫ If an employee has a family at the time of making a nomination, the
nomination shall be made in favor of one or more members of his family, and
any nomination made by such employee in favor of a person who is not a
member of his family shall be void.
⚫ If at the time of making a nomination the employee has no family, the
nomination may be made in favor of any person or persons but if the
employee subsequently acquires a family, such nomination shall forthwith
become invalid. In such a situation employee has to nominate his family
member or members.
⚫ Every nomination, fresh nomination or alteration of nomination, as the case
may be, shall be sent by the employee to his employer, who shall keep the
same in his safe custody.
⚫ In case of death of the nominee before the death of the employee, the
interest of the nominee shall revert to the employee. The employee, in such
cases, shall make a fresh nomination in respect of such interest.
⚫ You can use the Form F to nominate under the Gratuity.
Offences and Penalties
⚫ Violation of the provisions of the Act shall entail certain penalties. They are:
⚫ For avoiding any payment, if someone makes a false representation or false
statement shall be punishable with imprisonment for 6 months or fine up to
Rs. 10,000 or both.
⚫ Failure to comply with the provisions of this Act shall be punishable for a
minimum of 3 months which may extend upto 1 year or a fine of Rs. 10,000
which may extend upto 20,000.
⚫ Non-payment of gratuity under the Act will lead to offence and the employer
shall be punishable with imprisonment for at least 6 months and which may
extend upto 2 years unless the court provides for the sufficient reason for
less payment
Calculation
⚫ Calculation of gratuity depends upon two variables:

⚫ Salary
⚫ Superannuation

⚫ In calculating the gratuity fifteen days salary is given for every completed
year and as the number of working days in a month is considered to be 26
only (excluding the Sundays) therefore the formula for calculating the gratuity
would be:

⚫ Formula: Last drawn salary x 15/26 x Completed years of Service (including

a part of year in excess of six months)

⚫ In case of an employee working in a seasonal establishment he shall be paid

gratuity at the rate of 7 days wages for each season.
Employees covered under the
Payment of Gratuity Act, 1972
For private sector employees covered under the Payment of Gratuity
Act, 1972, gratuity is calculated using the following formula:

⚫ Formula: Salary at the time of retirement ÷ 26 × 15 × Completed

year of service.

⚫ While calculating completed year of service, if part of the month is

more than 6 months, then round off higher. For example, if the
duration of service is 18 years 7 months. Completed year of service
will be 19 years. If the duration of service is 18 years 6 months.
Then, completed years of service will be 18 years.
Employees Receiving Gratuity as per
Employment Contract
For private sector employees receiving gratuity as per terms of
employment (not covered under the Payment of Gratuity Act, 1972),
the following formula can be used for calculating gratuity:

⚫ Formula: Average salary ÷ 30 × 15 × Completed year of service.

⚫ While calculating average salary, compute the average salary of last

10 months immediately preceding the month of retirement. Also, as
discussed above, while calculating completed years of service,
ignore the part of months.
Example
If an employee had joined a job on 01-08-2005 and retired or got his
job terminated on 30-04-2019, with last drawn basic Salary of Rs
20,000 and DA of Rs 12000, his Gratuity will be:

Gratuity = (Basic + DA) x 15/26 x number of years.

Salary= 20,000+12000 = 32000

Number of Years =14
Here the employee has completed 14 years of service. The seven months of
his first year (August 2005 to March 2006) is to be counted as one year as
it is more than six months of service.
Gratuity = (32000) x 15/26 x 14
= Rs 258,461.5
For Employees who are not covered
in Payment of Gratuity Act
Suppose an employee work for a firm that does not comes under this
act ,However the basic salary that he last drew was 30,000/month and
he served the organization for 24 years 5 months

Gratuity = (Basic + DA) x 15/30 x number of years.

Salary= 30000
Number of Years =24
.
Gratuity = (30000) x 15/30 x 24
= Rs 3,60,000
Forms Used in Graturity
⚫ Form I-Application for the payment of Gratuity
⚫ Form J-Application for the payment of Gratuity by NOMINEE
⚫ Form K-Application for the payment of Gratuity by LEGAL HEIRS.
⚫ Form F-Nomination Form
⚫ Form G-To make a fresh nomination
⚫ Form H-Modification of the nominee
⚫ Form L-Issued by the employer to the employee stating amount and date of
payment.
⚫ Form M-Issued by employer stating reasons for rejection.
Income Tax
⚫ In case gratuity is received by an employee covered by the Payment
of Gratuity Act, 1972 – the same is exempt from income tax to the
extent of:
⚫ i) 15 days salary (7 days in the case of employees of seasons
establishment) based on the salary last drawn for every completed
year of service or part thereof in excess of 6 months;
⚫ ii) Rs.20,00,000 (Rs.10,00,000 before March 29, 2018, Rs.3,50,000
from September 24, 1997 to May 23, 2010); or
⚫ iii) Gratuity actually received, whichever is lower.
⚫ Gratuity received more than the exempted limit is subject to income
tax.