The Complete Guide to Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972

What is Gratuity?
Gratuity shall be payable to an employee on the termination of his employment after he has rendered continues service for not less than five years –

• On his superannuation, or
• On his retirement or resignation, or
• On his death or disablement due to accident or disease;

The condition of completion of five years continues service is not essential in case of the termination of the employment of any employee due to death or disablement. Generally, it was paid to the employee himself. However, in case of the death of the employee it shall be paid to the nominee or if no nomination has been made, to his heirs.

Extent & Applicability:
The Act extends to the whole of India. Provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu & Kashmir.,
The Act applies to:

• Every factory, mine, oilfield, plantation, port and railway company;
• Every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a state, in which 10 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 10 or more employee are employed, or were employed on any day of the preceding twelve months, as the Central Government, specify in this behalf. 
• A shop or establishment to which this Act has become applicable shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.

Key Points:

• Lump sum amount of money payable by an employer at the time of termination of the service, retirement, superannuation, resignation, disablement or death is termed as gratuity.
• The Act applies to- (I) Every factory, mine, oilfield, plantation, port and railway  company,(II) Every shop and establishment with ten or more persons are employed/were employed, on any day of the preceding twelve months (iii) Other establishments/ class of establishments with ten or more employees are employed/ were employed on any day of the preceding twelve months, as the Central Government may by  notification specify in this behalf
• Wages- All remuneration earned by an employee while- (i) on duty or on leave as per the terms of his employment, and (ii) which are paid or payable to him in cash. It includes dearness allowance but does not include-any bonus, commission, house rent allowance, overtime wages and any other allowance.
• Continuous service- Any employee is said to be in continuous service for a period of time if for that duration he has been in continues service. This also includes service which may be interrupted on account of- sickness, accident leave absence from duty without leave, lay off, strike, lock-out, and cessation of work.
• Continuous service for 1 year can be said - where employee has actually worked under  the employer for not less than (i) 190 days , in case of employee employed below the ground in a mine/ in an establishment which works for less than six days in a week, and (ii) 240 days in any other case.
• Continuous service for 6  months can be  said- where an  employee actually worked for  not less than (i) 95 days, in case of  employee employed below the ground in  a mine/ in  an establishment which works for less than six days in a week, and (ii) 120 days in any other case.
• Continuous service in seasonal establishment- where an employee employed for such period has actually worked for not less than 75 % of the number of days on which establishment was in operation during such period.

Calculation of Gratuity Amount Payable:

• In the establishments other than seasonal establishments- the employer shall pay the gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of 6 months. In case of  piece- rated employee, daily wages shall be computed on the average of   the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work  shall not be taken into account.
• In case of an employee who is employed in a seasonal establishment can be classified into two groups
• Those who work throughout the year &
• Who work only during the season

Computation of Gratuity of disabled employee: 
When an employee becomes disable due to any accident or disease and is not in a position to do the same work and re-employed on reduced wages on some other job, the gratuity will be calculated in two parts –
For the period preceding the disablement: on the basis of wages last drawn by the employee at the time of his disablement.
For the period subsequent to the disablement: On the basis of the reduced wages as drawn by him at the time of the termination of services


Mode of Payment of Gratuity:

The gratuity shall be paid either-(i) in cash, or (ii) in demand draft, or (iii) bank cheque to the claimant. If the claimant so desires and the amount of gratuity payable is less than one thousand rupees, payment may be made by postal money order after deducting the commission due to such postal money order from the amount payable. The intimation about   the details of payment shall be given to the controlling authority by the employer.

Where nominee or a legal heir is a minor- there the controlling authority shall invest the gratuity amount deposited with him for the benefit of such minor in term deposit with the State Bank of India or any of its subsidiaries or any Nationalized Bank.
Exemption in respect of Gratuity
Its treatment is discussed below:

• Retirement gratuity received under the Pension Code or Regulations applicable to members of the Defense Service is fully exempt from tax.
• Employees of Central Government/ Members of Civil Services/ local authority employees: Any death cum retirement gratuity is fully exempt from tax under section 10(10)(i).
• Other employees:

Covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the following:

• 20, 00,000
• Gratuity actually received
• 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months

Note: Salary for this purpose means basic salary and dearness allowance. No. of days in a month for this purpose, shall be taken as 26.

Not covered by the Payment of Gratuity Act, 1972
Any death cum retirement gratuity received by an employee on his retirement or his becoming incapacitated prior to such retirement or  on his termination or any gratuity received by his widow, children or dependents on his death is exempt from tax to the extent of least of  the following:

• 20,00,000
• Gratuity actually received
• Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored)

Note: Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnovers.

Few Significant Points about Gratuity:

Following are some of the most prominent points about payment of gratuity by an employer to an employee.

• An employee can receive a gratuity amount higher than Rs.10,00,000 from his/her employer, the exemption for tax in this case will be calculated as per the points listed above under taxation.
• In the recent Interim Budget of 2019, interim finance minister, Mr. Piyush Goyal announced that the existing tax-free gratuity limit will be increased to Rs.30 Lakh.
• The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.
• In case of death of the employee, the nominee or heir of the employee is paid the gratuity amount. The taxation for this is calculated for the receiver under the head – income from other sources.