Payment of Gratuity Act

Introduction
• Under the Payment of Gratuity Act, 1972, employers pay gratuity amounts to
their employees as a token of appreciation for their contributions to the
company.
• It is a monetary benefit provided to employees.
• The Act is applicable, to factories, mines, oil fields, plantations, ports,
railways, motor transport undertakings, companies, and to shops and other
establishments, Employing 10 or more workmen.
• Salaried employees, excluding trainees, temporary or contractual workers, are
entitled to gratuity payment after completion of a certain period of
employment at one organization.
• Once the Act becomes applicable to an employer – even if the number of
employees goes below 10, gratuity is still applicable.
• The gratuity amount is paid to the employees once they retire, resign, or are
laid off.
• The gratuity amount is paid to the employees after rendering
continuous service of five years.
A workman shall be said to be in continuous service for a period if he
is, for that period, in uninterrupted service, including service which
may be interrupted on account of sickness or authorized leave or an
accident or a strike, which is not illegal, or a lock-out or on account of
non-employment or discharge of such workman for a period which
does not exceed three months and during which period a substitute has
been employed in his place by the employer, or a cessation of work
which is not due to any fault on the part of the workman.
This means it includes all approved leaves, legal strike, weekly off
everything. It does not mean that you have to be present in the office
for whole 365 days in a year.
• Under the Gratuity Act, only an employer pays a gratuity amount to an
employee. Employers may either choose to pay the sum from their
account. Else, they can opt for a general insurance provider.
• According to gratuity rules, 2021, gratuity payable by companies to ₹
20 lakhs under provision of Payment of Gratuity Act, 1972 is exempt
of taxes. Tax-exempt amount used to be ₹ 10 lakhs previously.
• A company deposits the annual contribution with an insurance
provider. In return, it pays the payable gratuity amount to an employee
based on policy guidelines.
.
Gratuity Calculation:
• The gratuity amount earned by an employee depends upon the tenure
of the service and the last drawn salary.
• It is calculated based on the basic salary and dearness allowance.
• For gratuity calculation, every month is considered 26 days for the
organizations covered under the Gratuity Act 1972.
• Gratuity is paid for every 15 days for each completed year of service.
• In the last year of employment, if an employee serves for more than
six months, it will be rounded off to the next number.
• For example, if an employee serves for a total period of eight years or
seven months, it will be considered 9 years for gratuity calculation.
How to calculate Gratuity amount
The calculation formula is different for two broad categories:
1. Employer Covered Under Gratuity Act
2. Employer Not Covered Under Gratuity Act
In the first case, employers use the following formula:
Total gratuity amount = n*b*15 / 26
Where n = number of years in providing services to a company.
b= last basic salary and dearness allowance.
If employers are not covered under this act, they calculate the payable amount based on each
year's half-month salary. Accordingly, use the following formula:
Total gratuity amount = (15 * Your last drawn salary * the working tenure) / 30.
• Round off anything above 6 months to the next number.
• Similarly, round off anything below 6 to the previous number.
• For example, if the tenure of service is 7 years 8 months, consider it 8
months of service tenure during calculation.
• If your service tenure is 7 years 4 months, consider it 7 years as your
service tenure.
 Important Gratuity Rules
• Gratuity Act mandates that employees qualify to receive gratuity
payment after completing 5 years of service in a company.
• If an Employee Do Not Complete 5 years of Service
In case of an employee's death or disability due to accidents or disease,
an employer must pay his/her nominee or legal heir. It is applicable
irrespective of his/her years of service in an organization.
If the nominee is a minor, an Assistant Labour Commissioner will invest
gratuity sum in a term deposit in his/her name. It is for the financial
benefit of the minor till he/she becomes a major. The official deposits
this amount with a nationalised bank, such as the State Bank of India.
• The maximum gratuity payment that an employee can receive is
₹20,00,000. Thus, payments above ₹20,00,000 is a voluntary payment
and not forced by law.
Procedure to get gratuity
• Submit Application in form “I” by employee or Application in form
“J” by nominee (If employee is not alive) or Application in form “K”
by legal heir (if employee is not alive).
• Submit the application to the employer within 30 days from the date of
it becomes payable.
• The employer shall pay the gratuity within 30 days from the receipt of
the application. For belated payment the employer is liable to pay 10%
simple interest also.
• The employer will have to specify the amount payable and the
payment date within 15 days after receiving the application for the
gratuity amount.
• The employer will have to specify the reason for rejecting an
application for a gratuity in case of the rejection of the application.