Gratuity Payment Rules Act in India 1972

Gratuity is a sum of money that employers pay their employees as a sign of gratitude for the service they have performed over years. Gratuity is payable under the payment of the Gratuity Act, 1972. Gratuity is paid to employees who have completed five or more years of service in their respective companies. The basis for the calculation of gratitude is the last drawn salary and year of service provided by the employee. 

If a company, be it public or private sector has 10 or more than 10 employees working in their organisation, must pay gratuity to its employees. In this article, we will learn all that we need to know about gratuity rules in India, their eligibility, and the new gratuity rules in 2022.  

Key insights on Gratuity Payment Rules Act 1972

• The purpose of the Gratuity Act is to provide a monetary reward in the form of gratuity to employees for providing service.
• The employer is responsible for the payment of gratuity.
• Employers must pay a gratuity amount to employees.
• Gratuity is a part of the cost to the company (CTC) of an employee.
• Income tax is applicable on payment of gratuity as it is viewed as a part of the salary.

What are Gratuity Rules in India?

The gratuity rules are formed under the payment of gratitude act, of 1972. On 21st August 1972, this rule was passed by the parliament and came into force on 16th September 1972.

Gratuity rules in India are mentioned below:

Gratuity is payable if a company has 10 or more employees:

Companies with a workforce of 10 or more than 10 employees on a single day in the previous 12 months are subject to pay gratuity. Even if the employees of the company are reduced to below 10, it will still be liable to pay the gratuity, as per the Gratuity Act. 

Employees have to serve at least 5 years of service to be eligible for gratuity: 

Employees who have completed 5 years of service in the company are eligible for gratuity. However, the condition is not applicable in situations like the death or disablement of an employee. 

Calculation of gratuity is covered under the act: 

As we know, Companies with 10 employees in a day in the foregoing 12 months are covered under this act. 

Gratuity = (15× last drawn salary × number of completed years of service)/26

• The last drawn salary comprises basic and dearness allowance (DA) and no other part will be included in the salary. 
• Completed years of service comprise any year where an employee has rendered services for more than six months.
• You can you INDmoney's Gratuity calculator for ease.

Gratuity can be paid before retirement:

Generally, gratuity is paid after retirement but one can avail of gratuity under certain conditions such as:

• One can ask for gratuity while switching jobs after completing 5 years of service in the company. 
• If an employee dies while in service, the gratuity amount will be paid to the nominee or legal heir. 
• An employee is entitled to gratuity on his disablement due to an accident or a disease. 
• An employee is entitled to get gratuity if he has opted for VRS. 
• Gratuity is payable to an employee even on the termination of his employment but one can not claim gratuity in case of discontinuation of employment, fraud, theft, assault, rape, or molestation. 

Gratuity paid to a legal heir or widow of an employee will be exempted from tax:

When an employee passes away, the gratuity paid to his wife or legal heir will be exempt from tax. 

Gratuity up to 20 lakhs is exempted from taxation: 

Gratuity up to 20 lakhs is exempted from taxation which is paid by the organisation that comes under the Payment of Gratuity Act, 1972, and the gratuity payment which comes under central, state, and local government bodies are exempted from taxation as per gratuity rules 2021. 

Employers cannot deny paying gratitude to their employees even during bankruptcy:

An organisation must pay gratuity to its employees even during bankruptcy and no court order can stop an employee from availing of the benefits of gratuity payment.

Gratuity Eligibility in India 2024

Below are a few instances that describe when employees are eligible to receive gratuity.

• When the employee has completed their 5 years of continuous service in the respective company. 
• An employee is eligible to get gratitude at the time of his retirement.
• An employee passes away or suffers any disease or accident.
• An employee should be eligible for superannuation( under this program employee's fund deposited grows without any tax implications, until retirement or withdrawal.

What is the Payment of Gratuity Act, 1972?

As per the Indian law of payment of Gratuity Act, 1972, Corporation pays a one-time gratuity to retired employees and this law applies to railways, ports, oilfields, factories, shops, and mines. The gratuity is paid to employees who are covered with the term “ employee” under section 2(e) of the act in section 4 of the Payment of Gratuity Act, 1972. 

The gratuity includes 15 days' wages for every year and the service provided by the employee should be over six months or a partial year. The main objective of enforcing this act is to provide financial and social security to employees after retirement. It is a security act envisioned for those employees who provide services for a long time. 

Gratuity Law New Rules 2024

The new labor law was implemented on 1st July 2022 for all organisations and corporations. As per the new labor law, the working hours, Provident fund, and in-hand salary have shrunk. The biggest impact of this law will be on take-home salaries. 

• As per the gratuity rules 2024, organisations must ensure that 50% of employees' CTC (cost to company) is basic pay and the remaining 50% comprises employee allowances, house rent, and overtime. If the company pays any additional allowances or exemptions that exceed 50% of the CTC, it will be treated as remuneration.
• As per the gratuity new rules 2024, the law restricts the maximum basic pay to 50% of CTC which will increase the gratuity bonus that is to be paid to employees and the gratuity amount will be calculated on a large salary base that comprises basic pay and allowances.
• Employees get paid for working overtime which is working for 15 minutes or more.
• The government has made it clear that the work capacity is a maximum of 48 hours.

To conclude, Gratuity plays a vital role for employees as it acts as a post-retirement plan. Employees who are working in the public and private sectors should be aware of these gratuity rules to make sure that they can avail maximum benefits from it. It is a financial incentive provided to an employee for rendering service and his devotion to the company.