Every company, public or private, having 10 or more employees is mandated to pay gratuity to its employees. Gratuity is paid as a sign of gratitude. A gratuity is a financial payment made by an employer to an employee in exchange for services rendered to the company in accordance with the Payment of Gratuity Act of 1972. It’s covered by the pay. However, gratuities are only given to staff members who have worked for a company for at least five years.

What are the gratuity eligibility criteria?

*An employee has to complete 5 yrs of continuous service in a company.

*Gratuity is paid at the time of retirement except for certain conditions.

*The employee should be eligible for superannuation.

*Legal heir or nominee of an employee is eligible for gratuity in case of their passing or due to a disease or accident.

How is gratuity calculated?

Gratuity is a part of the cost to the company (CTC) of an employee. It is calculated based on the last drawn salary and years of service rendered by the employee. Following is the formula to calculate gratuity:

Gratuity = (15 × last drawn salary × working tenure)/30.

Steps of gratuity payment

The payment of gratuity involves three steps:

*An employee or an authorised person should send an application to their employer claiming gratuity

*The company calculates the gratuity amount and notifies the same to applicant and the controlling authority

*The employer has 30 days to pay gratuity to the applicant.

Calculation of gratuity in case of an employee’s death

In this case, gratuity is calculated based on the employee’s tenure of service, but the amount cannot be more than Rs. 20 lakh. The following table shows the rates at which the gratuity will be payable in case of death of an employee:

Tenure of service    Gratuity payable

Less than a year      2 x basic salary

*1 yr or more but less than 5 yrs           6 x basic salary

*5 yrs or more but less than 11 yrs       12 x basic salary

*11 yrs or more but less than 20 yrs     20 x basic salary

*20 yrs or more      Half the basic salary for each completed six-monthly period subject to a maximum of 33x of the basic salary

What is forfeiture of gratuity?

Section 4 of the Gratuity Act permits an employer to withhold paying gratuity to an employee in case:

*The employee is terminated due to negligence or wilful omission, damaging the e employer’s property. The forfeited sum is based on the extent of the damage done.

*The employee is terminated due to immoral behaviour, misconduct or other violent acts.

What are the gratuity rules?

1. Gratuity is payable by a company that has 10 or more employees on a single day in the previous 12 months. Even if the number of employees reduces to below 10, the company will be liable to pay the gratuity as per the Act.

2. Gratuity is payable only if employees serve the company for at least 5 yrs. However, this condition doesn’t apply in situations like the employee’s death or disablement.

3. Calculation of the gratuity is covered under the act. We will discuss the calculation in a while.

Generally, gratuity is paid after retirement. However, there are exceptions to this rule:

*Employees can ask for gratuity while switching jobs, provided they have completed 5 yrs of service in the company

*On the passing of an employee while in service, an employer has to pay the gratuity to the nominee or legal heir

*If an employee becomes disabled due to a disease or an accident, they are entitled to gratuity

*Employees opting for VRS are entitled to get gratuity

*An employee terminated can claim gratuity but not in case of discontinuation, theft, fraud, rape, assault or molestation

*Gratuity paid to an employee’s legal heir or widow is exempted from tax.

*Gratuity of up to Rs. 20 lakh paid by the organisation under the Payment of Gratuity Act, 1972, is exempt from tax. The gratuity paid under central, state, and local governments are exempt from tax as per Gratuity Rules 2021.

*An employer is mandated to pay gratuity to their employees even when the company is under bankruptcy.

*If a nominee is a minor, an Assistant Labour Commissioner will invest the gratuity in a term deposit offered by a nationalised bank on their behalf in their name.

New gratuity rules 2022

On 1st July 2022, the new labour law was implemented for all corporations and organisations. As per the new labour law, the provident fund, working hours, and in-hand salary have been reduced. Note the following highlights:

*Organisations must ensure that 50% of employees’ Cost to the Company (CTC) is basic pay, and the rest consists of allowances, overtime, and house rent. Allowances or exemptions paid in excess of 50% of the CTC will be treated as remuneration.

*The restriction of the maximum basic pay to 50% of CTC increases the gratuity bonus to be paid to employees. The gratuity amount is calculated on a large salary base comprising basic pay and allowances.

*Employees should be paid for working overtime – for 15 minutes or more.

*The work capacity is a maximum of 48 hours

Income tax and gratuity

Gratuity received by public sector employees apart from statutory corporations is exempt from tax.

For employees getting gratuity from an employer not covered under the Payment of Gratuity Act, the least of the below is exempted from the tax:

Rs. 10 lakh

Actual gratuity got by an employee

Half-month salary of every year that an employee has completed

For employees getting gratuity from an employer covered by the Payment of Gratuity Act, the salary of 15 days as per the last drawn salary is exempt.

Types of gratuity forms

Form I: to apply for gratuity payment

Form J: to be used by a nominee for gratuity payment application

Form K: to be used by a legal heir

Form F: to put in a nominee

Form G: to add in a fresh nominee

Form H: to modify the nomination

Form L: issued by the employer to the employee mentioning the date and the amount

Form M: issued by the employer to the employee mentioning the reason behind the rejection of gratuity

Form N: used by an employee to send an application to the labour commission

Form O: issued by the concerned authority requesting an appearance for a case hearing

Form P: summons issued by the concerned authority to be present for the case hearing.

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