What is Gratuity?

Gratuity is a statutory benefit given to employees as gratitude on the termination of his employment after he/she has rendered continuous service for not less than five years for the recognition of continuous, meritorious services and sincere efforts by the employee towards the organization.

Payment of Gratuity Act 1972 with Payment of gratuity (central) Rules 1972 deals with payment of gratuity to employees on the termination of his employment. 

This Act is extended to the whole of India except to the state of Jammu & Kashmir in cases related to plantation and ports.

What is the objective of the Gratuity Act?

The object of the act is to help the workman financially by giving gratuity after retirement for the recognition of continuous, meritorious services and sincere efforts by the employee towards the organization.

To whom the Gratuity Act is applicable?

This Act is applicable to Every employee engaged in factories, mines, oilfields, plantations, ports, railway, companies, shops or other establishments with 10 or more employees are employed, or were employed on any day of the preceding 12 months.

What are the eligibility criteria for availment of gratuity scheme by employees?

To avail the benefit of gratuity scheme, every employee shall have rendered continuous service for not less than five years except in case of death or disablement.

What is continuous service?

Continuous service includes a period of uninterrupted service by employee only, but in certain cases, it includes the period of interruption in continuous service which is as follows:

  • If an employee is not in continuous service for a period of 1 year, he shall be deemed to be in continuous service if during the period of 12 months preceding the date with reference to which the calculation is being made, the employee has worked under the employer for not less than
    1. Mine or any establishment which works for less than 6 days in a week - 190 days
    2. In any other case - 240 days
  • In case of seasonable establishments - if the employee is not in continuous service for 1 year, an employee shall be deemed to be in continuous service if he has worked for not less than 75% of the number of days on which the establishment was in operation during such period
  • Absence from duty without leave (not if order treating absence as a break in service is issued by employer)
  • Lay-off/Strike/Lock-out
  • Sickness/Accident/Leave
  • Cessation of work not due to any fault of employee

When shall the payment of gratuity be made to employees?

The amount of gratuity shall be paid to employees only on his superannuation or retirement or resignation, or death or disablement due to accident or disease. But in case of death or disablement condition of 5-year continuous service is not required to be fulfilled.

To whom the payment of gratuity shall be made?

The payment of gratuity shall be made to:

  • Employees
  • In case of death of an employee, it shall be paid to the nominee or heir of the employee.

How to calculate gratuity for the employees covered under the Act?

The amount of gratuity shall be computed as follows:

S.no Particulars Formula
1 In case of normal establishment (15 x last drawn salary x tenure of working) / 26
2 In case of seasonal employment 7 days wages for each season

Here “Last drawn salary” includes basic salary, dearness allowance, and commission received on sales.

When shall the payment of gratuity be done?

  • Time limit for payment - within 30 days from the date it becomes due.
  • In case of failure - interest will be charged as per the prevailing rate of interest issued by the central government till the date of payment actually made.

How can unpaid gratuity be recovered from an employer?

  • An application for recovery of gratuity amount from employer can be made to the controlling authority.
  • Then the authority will issue a certificate for that amount to the Collector.
  • Collector shall recover the amount of gratuity together with interest from the date of expiry of the prescribed time, as arrears of land revenue
  • Collector shall pay the same to the person entitled thereto.

What is the Statutory compliance on the part of the Employer?

There are certain obligations or the compliances on the part of the Employer which they are supposed to comply to, if not, they could be subjected to certain offences or penalties provided in the act. 

Several compliances that need to be followed are:

  • Notice of opening/change/closure of establishment shall be made to the controller.
  • Display notice within the establishment specifying the name of the officer with its designation authorised to receive notices under the act.
  • Verification of particulars of nomination filed in the form shall be done within thirty days of the receipt of the nomination form.
  • Payment of gratuity shall be made within 15 days of the claim received from the employee.
  • Intimation about the details of payment shall also, be given to the controller.

What are the forms and register to be maintained under the Gratuity Act?

Forms and registers to be maintained are as follows:

S.no Forms Description
1 Form A Notice of opening establishment by employer within 30 days
2 Form B Notice of change of establishment by employer within 30 days
3 Form C Notice of closure of establishment by employer within 30 days
4 Form D Notice for excluding husband from family sent by female employee
5 Form E Notice of withdrawal of notice for excluding husband from family sent by female employee
6 Form F Declaration of Nominee by employee
7 Form G Fresh nomination
8 Form H Modification or nomination
9 Form I Application for gratuity to be made by employee
10 Form J Application for gratuity to be made by nominee
11 Form K Application for gratuity to be made by legal heir
12 Form L Notice for payment of gratuity to employee
13 Form M Notice rejecting claim for payment of gratuity to employee
14 Form T Application for recovery of gratuity

When can the gratuity amount be forfeited?

Forfeiture of payment of gratuity can be made partially or fully depends on the extent of damage or loss or destruction caused to the property of employer due to any act, wilful omission or negligence of the employee.

Does insurance is compulsory for the employer for his liability towards payment of gratuity?

Every employer shall get insurance from life insurance corporation for his liability towards payment of gratuity.

What is the ceiling limit for the payment of tax-free gratuity?

The ceiling limit for the payment of tax- free gratuity is INR 20 Lakh.

What are the offences and penalties under the act?

  • In case of a false statement or false representation to avoid any payment: Imprisonment for a term which may extend up to 6 month or fine which may extend up to INR. 10000 or both.
  • In case of contravention of the provision of the Act: Imprisonment for a term which may extend up to 1 year or fine which may extend up to INR. 20000 or both.
  • In case of non - payment of gratuity: Imprisonment for a term which may extend up to 2 years or fine which may extend up to INR. 20000 or both.
  • In case of failure to pay the premium on compulsory insurance: fine which may extend up to INR. 10000 and INR. 1000 for each day during which the offences continue.

FREQUENTLY ASKED QUESTIONS (FAQs)

Am I eligible to receive Employees Gratuity Benefit Amount?

Yes, only if you completed five years of continuous service.

Is insurance compulsory for the employer for his liability for payment of gratuity?

Yes, every employer shall obtain insurance for his liability for payment towards gratuity.

Is five years of continuous service rule applies to all the employees in every circumstance?

No, in case of death and disablement, the condition of five-year continuous service rule is not applicable.

How to treat the number of months for the purpose of gratuity calculation after completion of 5 years?

If service exceeds 6 months even from 1 day, then it will be considered as 1 year for the purpose of gratuity calculation after completion of 5 years.

Are Temporary staff or Contract workers eligible to receive Gratuity amount?

Yes, only if they are considered as employees of the organization.