Gratuity

The eligibility criteria for payment of gratuity are laid down under the act. The details of the same are mentioned below.

• The employee has to complete a minimum of 5 years in the organization at the time of resignation or retirement.
• The employer that has employed a minimum of 10 employees in the preceding calculation of gratuity has to pay the gratuity amount.
• Employees who have died or have serious disabilities are also eligible to receive the payment of gratuity even if they do not complete the minimum period of 5 years.
• Employees who have suffered disability due to any disease are also eligible to receive the payment of gratuity even if they do not complete the minimum period of 5 years.

The Act does not include contractual employees in the payment of Gratuity even if such employees have completed the minimum period of 5 years. The employer, however, has the discretion to pay gratuity to such employees at a percentage determined by them.

The employee needs to have a continuous service in the organization to be eligible for gratuity. This uninterrupted service is defined as below.

• An employee is said to have uninterruptedly rendered their services during the period of employment even in case of sickness, leave, accident, absence sans leave provided that the organization does not mark such absence as a break from employment.
• Uninterrupted service can also include furloughing, lock-out, strike, and cessation of work provided that it is not due to any fault of the employee in question.
• In any other case, the employee is considered unable to fulfill the ‘continuous service’ criterion as per the clause mentioned above, service for any period of one year is considered provided
  • He/she has worked for a minimum of 191 days if such an employee works underground in mines or is employed in an organization with less than 6-day working weeks.
  • In any other case, he/she has worked for a minimum of 240 days.
  • Such an employee is considered to be in continuous employment for 6 months provided he/she has worked for a minimum of 95 days, in case the employee in question works underground in mines or works in an establishment that has less than 6-day working weeks.
  • He/she worked for a minimum of 120 days, in any other case.

• If an employee belonging to a seasonal organization does not fulfill the ‘continuous service’ criterion as per the first clause for 1 year or 6 months, then such employees must work for a minimum of 75% of the days in which such an establishment was functional, to be deemed to be in ‘continuous service’.

Calculation of Gratuity

The Act does not provide for a specific percentage of gratuity to be paid to the eligible employees. The Act, however, does provide for specific formulas and conditions that can be considered while calculating the Gratuity to be paid to the employees.

The calculation for gratuity can be calculated based on the last drawn salary of the eligible employee. The formula for the same is calculated on the basis of the last 15 days of salary for every completed year of service.

Such formula for the calculation of gratuity is mentioned below.

Total Gratuity Payable = (Last Drawn Monthly Salary) x (15/26) x (Number of years of service completed)

Last drawn salary includes the Dearness Allowance that is paid to the employees by the organization.

Although the days in any month are 30 or 31, the Act provides for 26 days to calculate the gratuity payment. This is on the premise that the working days in any month are about 26. For employees that are not covered by the Act, the Gratuity amount is calculated on the basis of the half month salary for each completed year.

The formula for the same is  

Total Gratuity Payable = 15 x Last drawn salary x Number of years of service completed / 30

Payment of Gratuity to the Employee

The maximum duration to disburse the gratuity payment in favour of the employee is within 30 days of sanctioning the same. The employer cannot delay in the payment of gratuity once sanctioned. In case the payment is delayed, the employer is liable to pay simple interest to the employee on the amount of gratuity sanctioned. This simple interest is calculated from the date when gratuity becomes payable till the time it is actually paid. The rate of such interest cannot exceed the rate stipulated by the Government in this regard.

Gratuity payment also provides tax benefits in the hands of employees. This tax benefit is an exemption up to maximum of Rs. 20,00,000. The total limit is with respect to each employee for the entire career of the employee. Hence such limit is applied on all the gratuity payments received by the employee.

Following are the types of employees that are covered under the above exemption limit as per the Payment of Gratuity Act, 1972

• Government Employees
• Employees covered by the Payment of Gratuity Act, 1972

Payment of Gratuity in Case of Death of the Employee

Payment of Gratuity Act, 1972 covers the employees that have deceased before completing their continuous period of 5 years as eligible for gratuity as well. They are exempted from the basic rule of the continuous period of service. The actual payment of gratuity to such deceased employees is mentioned below.

Nomination under Gratuity

Nomination under the Payment of Gratuity Act can be allowed to ensure that the family of the employee gets the benefits of gratuity payment in the event of death of the employee. For this, the employee has to fill in the required form and duly submit the same within 30 days of completing one year of service with the organization.

Such nomination can be done only in favour of any family member of the employee. Any nomination in favor of a person other than the family of the employee is not allowed or tenable as per the provisions of the Act.

In the event of death of the nominee before the employee, such nomination will become void and the employee will have to submit a new nomination by filling and submitting Form F.

Forfeiture of Gratuity Payment

The Act provides a remedy for the employer to forfeit the payment of gratuity towards the eligible employees. This is allowed in case the employee is terminated from the services of the organization due to any of the following reasons.

• An Act which is lawless in nature
• Any act that is considered disorderly 
• Rash and violent behaviour of the employee
• Any offence that involves moral turpitude of the employee

Any of the above reasons provide the employer a reasonable reason to deny or forfeit the payment of gratuity that is due to such employee. The basic premise for such forfeiture is that these acts are committed during the tenure of the employee with the said organization.

FAQs – Gratuity