Some Basics about Gratuity:
Gratuity Act is applicable to all establishments, where the 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 10,000 then his gratuity will be paid as per following formula.
(10,000/26)*15* 10
Please note that above formula will remain same irrespective of an 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 the employee has completed 5 years?
Yes, the employer can forfeit gratuity even if the 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 has 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 the employee during his employment. There should be a proper inquiry held after which employee was found guilty of aforesaid act or misconduct. Once proved guilty, the employer should issue termination note to employee describing his misconduct.
FAQ 3: Gratuity Payment when the employee has completed 4 years and 240 days in the 5th year?
This is one the most frequently asked question and there are various views available on it.
As per Section 2A of Gratuity Act (Continuous Service), an employee is eligible for gratuity if he has completed:
(i) one hundred and ninety days, in the case of an employee, employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case;
Earlier, we were also of opinion that gratuity can only be paid once an employee completes 5 years of continuous service which is not the case now as stated above. Following is the complete draft of the Section 2A of Gratuity Act for better understanding:
Section: 2A Continuous service.
For the purposes of this Act, – (1) an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order [***] treating the absence as break in service has been passed in accordance with the standing order, rules or regulations governing the employees of the establishment), lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act. (2) where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer – (a) for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than – (i) one hundred and ninety days, in the case of an employee, employed below the ground in a mine or in an establishment which works for less than six days in a week; and (ii) two hundred and forty days, in any other case; (b) for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than – (i) ninety-five days, in the case of an employee, employed below the ground in a mine or in an establishment which works for less than six days in a week; and (ii) one hundred and twenty days, in any other case; Explanation: For the purpose of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which – (i) he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 (20 of 1946), or under the Industrial Disputes Act, 1947 (14 of 1947), or under any other law applicab1c to the establishment; (ii) he has been on leave with full wages, earned in the previous year; (iii) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment and (iv) in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed twelve weeks. (3) where an employee employed in a seasonal establishment, is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for such period if he has actually worked for not less than seventy-five percent of the number of days on which the establishment was in operation during such period.
FAQ 4: Gratuity payment in case employee has worked for more than 5 years with the same employer but in the 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 the same management. The employee got his Full and Final from ABC Company but not the gratuity amount as he has not completed 5 years there. He has spent another 2.5 years in company XYZ and resigned. At the time of his Full and final, will he be eligible for gratuity?
The 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 the responsibility of the employer. Nowhere in the act, it is mentioned that employer needs to take any sort of insurance policy for gratuity payment. Hence it is up to the employer whether they want to take an insurance policy to cover its gratuity liability.
There are various benefits of taking insurance policy for the insurance company to cover gratuity liability, let’s say LIC:
Employer ensure that its liability is taken care by giving regular premium to LIC
The employer gets tax rebate against that payment.
LIC also do life insurance for each employee hence in case of employee’s death, employee family gets sum insured amount apart from gratuity.
FAQ 6: How much gratuity amount is exempted from income tax?
Up to Rs 20 Lacs. Click here to see notification by income tax department.
FAQ 7: Can a company refuse to pay gratuity due to financial Loss to employees?
No, even if the company is not doing financial well, the company is bound to pay gratuity amount.
The company should ensure that it pays gratuity within 30 days from the date when gratuity becomes payable to an employee. Also, it is the responsibility of the employer to notify the employee about his gratuity payment even if the employee does not apply for same. It is employer duty to pay the gratuity.
FAQ 8: Will an employee resigning from service or retrenched by the employer will be eligible for Gratuity?
Yes, if they are satisfying the criteria of completion of 5 years. In case of an employee who has been retrenched after 5 years of continuous service will get both gratuity and retrenchment benefits.
FAQ 9: Gratuity in case of a contractual employee. Who will be responsible to pay gratuity?
In case of a contractual employee, the contractor is liable to pay gratuity but if the contractor does not pay gratuity to the employee then the principal employer can be directed to pay the gratuity amount.
FAQ 10: Will trainee be entitled to Gratuity after completion of 5 years?
Yes. But employees who are hired for some temporary work should not be considered under gratuity act.
FAQ 11: Company making gratuity as part of CTC is correct?
This is another most debatable topic. Basically, CTC stands for, the cost to the company and every company takes it the different way. Hence, it is up to the 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 the 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 the liability of the employer to pay gratuity to employee in two cases: 1) when employee completes 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 20 L then company is bound to pay max 20 L. In case of the company want to pay more than 20 L then the company can pay it as the performance bonus or ex gratia.
FAQ 13: How to treat the 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 a year and he will get gratuity for 6 years but in case of employee has worked for 5 years and 5 months then he will be eligible for 5 years gratuity payment only.