Gratuity Payment Rules Act in India 1972
The Gratuity Act of 1972 in India, ensures the payment of gratuities to the employees in India. This act covers all the factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, and shops or establishments with 10 or more workers.
Here's how it works:
- Payment Rate: Employees get a gratuity of 15 days' wages for each year of service, with a maximum limit of ₹10 lakh.
- Seasonal Work: For seasonal jobs, the gratuity is 7 days' wages for each season worked.
What is Gratuity?
Gratuity is a lump sum compensation made to the employees, as a gratitude and acknowledgment towards their hard work and effort over all the years. Generally, gratuity is received when the employee has completed 5 years of working with an organization.
It also serves as a motivation for employees, as a recognition of their input.
Who is responsible for paying gratuity?
It is mandatory for companies that have a workforce of a minimum of 10 people to provide gratuity to their employees, as per the Gratuity Payment Rules Act in India 1972.
Gratuity Act 1972 Eligibility
As per the act, to be eligible for gratuity, an employee must have worked for the same company for a minimum of 5 years. This will be paid to employees at the time of their-
- Retirement or resignation
- At the time of their superannuation
For the calculation for this 5 years, 1 year would be 240 working days, for people not working undergrounds. For those who work underground, e.g., in mines and under such conditions, for them 1 year would be 190 working days.
This eligibility of 5 years is not compulsory in the case of an employee’s death or disablement due to an accident or disease.
Disablement here means an injury or illness that prevents an employee from doing the work they were able to do before the accident or illness happened.
Nomination under the Gratuity Act 1972
As per, Gratuity Payment Rules Act in India 1972, after completion of 1 year of service, an employee needs to make a person nominee for their gratuity, in case of death.
Below mentioned are the clauses for nomination under this act-
- The amount of gratuity in this situation can be distributed amongst more than one nominee.
- At the time of nomination, if the employee has a family, then the nomination would be in favor of any of the member
- In case an employee does not have any family, nomination can be made in the favor of a 3rd party, but this is valid only till the time when the employee has no acquired family.
- If the submitted nominee dies, the employee needs to make another family member their nominee
- In case of any change in the nomination, the employee needs to do a written submission to their employer.
Payment of Gratuity
Below are the mentioned times when gratuity is being paid-
- Retirement - At the time of employee retirement, the employer pays them a gratuity as a token of gratitude for their hard work.
- Resignation - If an employee resigns after completing 5 years of work within the organization, they are paid gratuity.
- Death - On the death of an employee, their gratuity amount is paid to their nominee.
- Disability - Gratuity is also paid, in case of any injury or illness that prevents an employee from doing the work they were able to do before the accident or illness happened
Gratuity calculation
Gratuity is calculated based on three main factors:
- the employee’s last drawn salary
- the number of years they have worked with the organization, and
- the gratuity rate set by the employer.
Here’s the formula to calculate gratuity:
Gratuity = (Last drawn salary x Number of years of service x 15) / 26
Where-
Last drawn salary: The final salary the employee received.
Number of years of service: The total time the employee has worked with the organization.
15: Represents the number of days of salary for each completed year of service.
26: Represents the number of working days in a month.
Use our Gratuity Calculator to easily compute your gratuity amount.
Example Calculation-
If an employee worked for 8 years and their last drawn salary was Rs. 50,000 per month, the gratuity would be calculated as follows:
Gratuity = (50,000 x 8 x 15) / 26 = Rs. 2,30,769
So, the employee would receive Rs. 2,30,769 as gratuity
Important Points
- The maximum gratuity payable under the Payment of Gratuity Act 1972 is Rs. 20 lakhs.
- Employers can set different gratuity rates, which must be specified in the employment contract.
If an employer specifies a gratuity rate of 18% of the employee’s last drawn salary, and the employee worked for 7 years with a last drawn salary of Rs. 60,000 per month, the calculation would be:
Gratuity = (60,000 x 7 x 18) / 26 = Rs. 2,91,923
In this case, the employee would receive Rs. 2,91,923 as gratuity. By understanding these factors and the formula, employees can easily calculate their gratuity amount.
Tax Implications on Gratuity
Situations | Income Tax Implications |
Gratuity for Government employees | Fully exempt |
Gratuity for employees covered under the Payment of Gratuity Act, 1972 | From the following, the least amount is exempt from the tax
|
Gratuity for employees not covered under the Payment of Gratuity Act, 1972 | From the following, the least amount is exempt from the tax
|
Gratuity for employee in case of their death | Fully exempt |
Gratuity received by an employee in case of a disability | Fully exempt |
Conditions for Termination of Gratuity
As, per the Gratuity Payment Rules Act in India 1972, gratuity is denied to employees, in below mentioned circumstances-
- Committing an offense involving moral dishonesty.
- Engaging in riotous or disorderly behavior, or any other violent act.
What are the new gratuity rules for private sector employees?
As per the new gratuity rule, employers will have to raise the basic salary of their employees by 50%. Restricting the allowance to 50% of the total salary will lead to an increase in the employer’s payment on manpower gratuity, which is paid to the working staff in a company for more than five years.
What can employees do if gratuity is not paid?
You can send a legal notice to your organisation or employer to give the gratuity amount and if he still doesn't pay, you can approach the labour commissioner's office.
How gratuity can be calculated?
The formula to calculate gratuity is Gratuity = (15 × last drawn salary × working tenure)/30
Who can be eligible to receive gratuity in India?
As per the Gratuity Act 1972, An employee needs to provide service to his employer for at least five years or more.