Some Basics about Gratuity

 Gratuity Act is applicable to all establishments, where number of employees, are 10 or more in any
day of the preceding 12 months. Click here to download the Gratuity bare act.
 Charitable institutes and hospital are also covered under the act.
 It includes both commercial and non commercial establishment like educational institutes etc.
 Only Basic and Dearness allowance should be considered as wages for the purpose of Gratuity.
 Gratuity payment formula:
Example: If an employee leave company after 10 years and his last Basic + Dearness allowance is 10000
then his gratuity will be paid as per following formula.
(10000/26)*15* 10
Please note that above formula will remain same irrespective of employee working in 5 days a week
establishment.
FAQ 1: Can an employee claim Gratuity even before completion of 5 years?
Yes, An employee can claim gratuity even before completion of 5 years in followings cases:
 Death (to his nominees)
 Disablement
But the quantum of gratuity will be as per act.

FAQ 2: Can employer forfeit Gratuity, even if employee has completed 5 years?
Yes, employer can forfeit gratuity even if employee has completed 5 years in following cases:

 If the services of such employee have been terminated for his riotous or disorderly conduct or any
other act of violence on his part, or
 If the service of such employee have been terminated for any act which constitutes an offense
involving moral turpitude, provided that such offense is committed by him in the course of his employment.

Please note that above act should have been committed by employee during his employment. There should
be a proper enquiry held after which employee was found guilty for aforesaid act or misconduct. Once
proved guilty, employer should issue termination note to employee describing about his misconduct.

FAQ 3: Gratuity Payment when employee has completed 4 year and 240 days in 5 thyear?
This is one the most frequently asked question and there are various views available on it.

In one of the case, Madars High Court has held that an employee who has completed 4 years and 240
working days in 5th year will be entitled for gratuity i.e. 4 years 10 months and 11 day.

Although, there is no amendment made in the gratuity act, hence the confusion. If you ask me i will take it
as, if your establishment is in Madaras then 240 working days in 5 th years will be considered else you can
only claim when you complete 5 years.

FAQ 4: Gratuity payment in case employee has worked for more than 5 years with same employer
but in different establishment?
Let’s take an example, that if an employee has worked in a company ABC for 3 years and due to some
reason, he has been moved to company XYZ under same management. Employee got his Full and Final from
ABC Company but not the gratuity amount as he has not completed 5 years there. He has spend another 2.5
years in company XYZ and resigned. At the time of his Full and final, will he be eligible for gratuity?

Answer is yes as both the companies are under same management and employee has completed 5.5 years
to gather in both companies.

FAQ 5: Do company need to take insurance policy against LIC? Is it mandatory?

Gratuity payment is responsibility of employer. Nowhere in act, it is mentioned that employer need to take
any sort of insurance policy for gratuity payment. Hence it is up to employer whether they want to take
insurance policy to cover its gratuity liability.

There are various benefits of taking insurance policy for insurance company to cover gratuity liability, let’s
say LIC:
 Employer ensure that its liability is taken care by giving regular premium to LIC
 Employer get tax rebate against that payment.
 LIC also do life insurance for each employee hence in case of employee’s death, employee family get
sum insured amount apart from gratuity.

FAQ 6: How much gratuity amount is exempted from income tax?

Upto Rs 20 Lacs. Click here to see notification by IncomeTax department.
FAQ 7: Can a company refuse to pay gratuity due to financial Loss to employees?
No, even if company is not doing financial well, company is bound to pay gratuity amount.

Company should ensure that it pays gratuity within 30 days from the date when gratuity become payable
to an employee. Also it is responsibility of employer to notify employee about his gratuity payment even if
employee do not apply for same. It is employer duty to pay the gratuity.

FAQ 8: Will an employee resigning from service or retrenched by employer will be eligible for
Gratuity?
Yes, if they are satisfying the criteria of completion of 5 years. In case of employee who has been retrenched
after 5 years of continuous service will get both gratuity and retrenchment benefits.

FAQ 9: Gratuity in case of contractual employee. Who will be responsible to pay gratuity?
In case of contractual employee, contractor is liable to pay gratuity but if contractor do not pay gratuity to
employee then principal employer can be directed to pay the gratuity amount.
FAQ 10: Will trainee be entitled for Gratuity after completion of 5 years?
Yes. But employees who are hired for some temporary work should not be considered under gratuity
act. Please download some important judgement in support of this.

FAQ 11: Company making gratuity as part of CTC is correct?

This is another most debatable topic. Basically CTC stands for, cost to company and every company takes it
different way. Hence, it is up to company whether they want to make it part of employee CTC or not.

There are two views:

One, employee become eligible for gratuity only after completion of 5 years so how come company can
make it part of employee CTC and what if employee do not complete 5 years and leave the company before.
Second, as it is liability of employer to pay gratuity to employee in two cases: 1) when employee competes
5 years and 2) in case of death and disablement irrespective of completion of 5 years hence employee
should make it part of CTC especially when employer has taken insurance policy to cover gratuity liability.

FAQ 12: What is the ceiling of gratuity amount payment?

It is Rs 20 L. In case an employee gratuity amount is more than 10 L then company is bound to pay max 10
L. In case company want to pay more than 20 L then company can pay it as performance bonus or ex
gratia. Click here to download the notification for same.

FAQ 13: How to treat number of months for the purpose of gratuity calculation after completion of
5 years?
For example, if an employee has worked for 5 years and 7 months then for the purpose of gratuity
payment, 7 months will be rounded off to an year and he will get gratuity for 6 years but in case employee
has worked for 5 years and 5 months then he will be eligible for 5 years gratuity payment only.

Conveyance Allowance
New Delhi: The Finance Ministry has notified the increase in transport allowance to Rs. 1,600 a month
from Rs. 800 as announced in the Budget for 2015-16.
As part of his "extension of benefits to middle class tax payers", Finance Minister Arun Jaitley had doubled
the transport allowance exemption to Rs. 1,600 per month.
From now onwards, an individual would get tax relief on Rs.19,200 per year as compared to Rs. 9,600.
The notification issued by the Central Board of Direct Tax (CBDT) further said the exemption limit for blind
and orthopaedically handicapped to has been doubled to Rs. 3,200 a month.
Transport allowance is exempted from income tax.

Bonus
Govt hikes wage ceiling for bonus to Rs 21,000 per month from Rs 10,000

1. The Lok Sabha has approved amendments to the Payment of Bonus Act that seeks to make
more workers eligible for bonus by raising the monthly pay eligibility limit of employees to
Rs 21,000 from Rs 10,000.
2. The bill, tabled in the house earlier this month, also seeks to enhance the monthly bonus
calculation ceiling to Rs 7,000 per month from Rs 3,500, thus substantially increasing the
amount of bonus.
3. Both the proposed changes are in line with the demands of 10 central trade unions, which
had observed a day-long strike on September 22.
4. "We are thankful to the government for fulfilling one of its commitments made to our 10-
point charter of demands and hope that it continues to work towards fulfilling its other
commitments as well," said Vrijesh Upadhaya, general secretary of the RSS-affiliated
Bhartiya Mazdoor Sangh.
5. Labour minister Bandaru Dattatreya said his government is committed towards welfare of
the workers. "I thank all parties for supporting the historic decision of this government," he
said after the discussion in Lok Sabha.
6. The bill will now be tabled in Rajya Sabha. Once approved, it will be made effective from
April 1, 2014.

7. The Payment of Bonus Act 1965 is applicable to every factory and other establishment in
which 20 or more people are employed on any day during an accounting year.
8. The bill also provides for a new proviso in Section 12, which empowers the central
government to vary the basis of computing the bonus.
9. As it stands today, Section 12 says that where the salary or wage of an employee exceeds Rs
3,500 per month, the minimum or maximum bonus payable to the employee shall be
calculated as if his salary or wage was Rs 3,500 per month.
10. The last amendment to both the eligibility limit and the calculation ceilings under the Act
was carried out in 2007 and made effective from April 1, 2006.
11. This amendment in the Act to increase wage ceiling and bonus calculation ceiling was one
of assurances given by the Centre after 10 central trade unions went on a day-long strike
on September 2.

12. Press Information Bureau

Government of India
Ministry of Labour & Employment
08-January-2016 17:47 IST
13.The Payment of Bonus (Amendment) Bill, 2015 notified:Increase in the
Eligibility Limit under clause (13) of Section 2 and Calculation Ceiling under
Section 12 of the Payment of Bonus Act, 2015

The Payment of Bonus (Amendment) Bill, 2015 was passed by the Parliament in the just
concluded Winter Session of the Parliament. The Payment of Bonus (Amendment) Act, 2015
has been published in the Gazette of India, Extraordinary on 1st January, 2016 as Act No. 6
of 2016. The provisions of the Payment of Bonus (Amendment) Act, 2015 shall be deemed
to have come into force on the 1st day of April, 2014.

The Payment of Bonus (Amendment) Act, 2015 envisages enhancement of eligibility limit
under section 2(13) from Rs.10,000/- per month to Rs.21,000/- per month and Calculation
Ceiling under section 12 from Rs. 3500 to Rs.7000 or the minimum wage for the scheduled
employment, as fixed by the appropriate Government, whichever is higher. The Payment of
Bonus (Amendment) Act, 2015 also mandates previous publication of draft subordinate
legislations, framed under the enabling provisions under the said Act, in the Official Gazette
for inviting objections and suggestions before their final notification.

The Government has been receiving representations from trade unions for removal of all
ceilings under the Payment of Bonus Act, 1965. It is also one of the demands made by them
during the country-wide General Strike held in February, 2013 and September, 2015. As the
last revision in these two ceilings were made in the year 2007 and was made effective from
the 1st April, 2006, it was decided by the Government to make appropriate amendments to
the Payment of Bonus Act, 1965.

These changes in the Payment of Bonus Act, 1965 will benefit thousands of work force.
Bonus Payment
Bonus Pay in India: Every employee not drawing salary/wages beyond Rs. 10,000 per month who has
worked for not less than 30 days in an accounting year, shall be eligible for bonus for minimum of 8.33% of
the salary/wages

Bonus is a reward that is paid to an employee for his good work towards the organisation. The basic
objective to give bonus is to share the profit earned by the organisation amongst the employees and staff
members. In India there is a principle law relating to this procedure of payment of bonus to the employees
and that principle law is named as Payment of Bonus Act, 1965.

The Payment of Bonus Act applies to every factory and establishment employing not less than 20 persons
on any day during the accounting year. The establishments covered under the Act shall continue to pay
bonus even if the number of employees fall below 20 subsequently.

Eligibility: Every employee not drawing salary/wages beyond Rs. 10,000 per month who has worked for not
less than 30 days in an accounting year, shall be eligible for bonus for minimum of 8.33% of the
salary/wages even if there is loss in the establishment whereas a maximum of 20% of the employee’s
salary/wages is payable as bonus in an accounting year. However, in case of the employees whose
salary/wages range between Rs. 3500 to Rs. 10,000 per month for the purpose of payment of bonus, their
salaries/wages would be deemed to be Rs. 3500.

There are provisions and benefits for newly formed establishments as well. As per these provisions/benefits,
the first five accounting years following the accounting year in which the employer sells goods/renders
services, bonus is payable only in respect of the accounting year, in which profits are made but the
provisions of set on and set off would not apply.

Applicability: The Act is applicable in whole of India where 10 or more workers are working, or were
working on any day of the preceding 12 months with the aid of power. Or whereon 20 or more workers are
working or were working on any day of preceding 12 months without the aid of power.

Calculation of bonus: Salary/wages and dearness allowance (DA) are included while calculating bonus.
However, other allowances such as over-time, house rent, incentive or commission are not included.

Forfeiture of Bonus: An employee who is dismissed from service on the grounds of fraud, riotous or violent
behaviour at the premises of the establishment or for the theft, misappropriation or sabotage of any of the
property of the establishment as mentioned in the Act. This shall not only disqualify him from receiving the
bonus for the accounting year in which he was dismissed but also for the past years which were remained
unpaid to him.

Time limit for payment of bonus: It is mentioned in the Act that all amounts payable to an employee by the
way of bonus are to be paid in cash. It is also mentioned that within 8 months from the close of the
accounting year the bonus should be paid to the employees. In exception to where there is dispute
regarding payment of bonus pending before an authority (Under Industrial Disputes Act) within 1 month from
the date on which the award becomes enforceable or settlement comes into operation, in respect of such
dispute.

There is a proposed amendment in the Payment of Bonus Act in the year 2010, but which is still under
proposal and has not come into force. The amendment bill is known as “The Payment of Bonus
(Amendment) Bill, 2010” and will come into force on a date when Central Government may notify it by official
gazette.