People have lot of query about gratuity, its applicability, judgment, benefit, calculation and so on. So, I decided to write something about it. Doing business in India is not that easy. You have various labour legislations, you have to comply with that and considering our nature- to avoid compliances as much as possible, it makes things worst.
Avoiding labour law compliance is not good. As far as and as soon as possible, one should do it. HR should play a vital role and from the very beginning start complying with the labour laws. It saves lot of money, reputation and time of the company.
Payment of Gratuity Act- an introduction
Payment of Gratuity Act is an employer welfare legislation enacted with the purpose to benefit employees who have worked for 5 years and more continuously in an organisation. Gratuity is determined amount through this Act recognizing their contribution to the organisation. The Act is enacted as The Payment of Gratuity Act 1972.
To whom this Act is applicable:
Any organisation whether it is a factory or a shop or a commercial establishment or mine oe railway, a private limited company or a public limited company where 10 or more people are working. Once the employee strength reaches 10, the Act becomes applicable and even after that if employee number reduced to less than 10, it remains applicable. Earlier, it was not applicable to teachers but after amendment to section 2(e) of the Act, it has defined as it includes any person, employed to do any kind of work. So there is no confusion. Irrespective of the nature of the work and organisation, The Payment of Gratuity Act is applicable to all organisation employing 10 or more people.
How is Gratuity Calculated and how much it is payable?
Gratuity is payable at the rate of 15 day's last drawn basic salary + Dearness allowance (DA) for number of years completed. I am not considering DA here as only government companies have this kind of structure, most of the private companies have only basic salary as a component.
For instance, suppose an employee has worked in an organisation for 10 years. On his last date his basic salary is 17000 Rs. per month, in this case, his 15 days basic salary for no. of years completed will be payable.
To calculate 1 day's basic salary, it should be divided by 26 (considering 1 compulsory leave in a week as per The Factories Act and Shops and Establishment Act). So the calculation will be as follows:
17000(Monthly basic salary)/26(Total days in a month)X15 (15 days basic salary) X 10 (No. of years of service completed)
= 17000/26 X 15 X 10
Is there any maximum limit for Gratuity Payment?
Yes, it is Rs. 10,00,000/- (Rupees Ten Lakhs Only)/. However company is free to pay more than the limit. However only amount upto Rs. 10 lakhs will be tax free.
When is the gratuity amount payable
For every employee who has completed 5 years of continuous service, the Gratuity amount is payable on following conditions:
(i) On his superannuation (Attaining the age of retirement)
(ii) On his retirement or resignation i.e. leaving the service
(iii) On his death or disablement due to accident or disease (5 years of service is not necessary)
What compliance does a company need to do under Payment of Gratuity Act
For detail compliance, please refer Gratuity rule of your state. Normally, it is same across all over India. Gratuity Act is passed by the parliament, after this, state can make its own rule based on the Act. It should not contravene any provision of the Act. You need to comply following:
1. As soon as the Gratuity Act become applicable, you should inform to the controlling authority i.e. to The Labour Commissioner office under whose jurisdiction your office falls in Form A under the Payment of Gratuity (Maharashtra) Rules, 1972 as per Rule 3 (1)
You may download a sample form A as follows:
This form is based on Gujarat rules but more or less all forms are same
2. Any changes in company's particular: Under the Rule 3 (2) of Payment of Gratuity (Maharashtra) Rules, 1972, The Employer must submit a Notice in Form ‘B’ to the Controlling Authority i.e. to labour commissioner of the area within 30 days of any change in the name, address, employer or nature of business. Please note employer means Directors of the company.
You may download form B from here:
3. Display of extract of the rules/ Act: Under 4 of Payment of Gratuity (Maharashtra) Rules, 1972, you must display extract of the Act near the main entrance of the company. I know it is difficult for a modern organisation specially MNC, please make it available on intranet site, so employee can access it. It should be in English and in local language understood by majority of the employee (so if you have a factory and majority of the employees are Marathi speaking, the extract should be in Marathi and for other state in local language.
4. Notice of closure of establishment: Even if you wish to close your organisation, a notice under form C must be given to the controlling authority i.e. assistant commissioner of labour/ commissioner of labour's office. Basically, this provision is made for safeguarding employees and to ensure all those who are eligible for Gratuity gets their amount before closure of the company.
5.Nomination: Please ensure that your all employees have given Nomination under payment of Gratuity Act. If not, circulate nomination form to all employees, ask them to fill it and submit it. Give them one copy back. It is very essential. It is also mandatory to keep all the nomination form in safe custody. Please keep them in employee's HR file or any other place from where it can be produced as and when required.
You may download Gratuity nomination form F from following link:
6. Informing employee and controlling authority about gratuity amount payable: As and when Gratuity amount is payable, the calculation should be shown to employee as well as to The Controlling Authority.
Is insurance policy mandatory under payment of Gratuity Act for organisations?
Under section 4(a) of The Gratuity Act, it was made compulsory to have a insurance policy but it should have come only after the notification from government about effect of the same. In fact, the compulsory insurance would have protected employee's rights even during the bankruptcy of the organisation. However government has not notified it so it is not mandatory for organisation to create Gratuity Fund with LIC or any other insurance service provider. However, I strongly recommend to have a gratuity policy. However, it is mandatory to make provision for Gratuity under AS-15 (Accounting Standard 15- employee benefit) in India for any companies having turnover of Rs. 50 crore and more. The coverage of AS-15 is as follows:
(i) Enterprises whose equity or debt securities are listed whether in
India or outside India.
(ii) Enterprises which are in the process of listing their equity or
debt securities as evidenced by the board of directors resolution
in this regard.
(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises,
whose turnover for the immediately preceding accounting period
on the basis of audited financial statements exceeds Rs. 50 crore.
Turnover does not include other income.
(vii) All commercial, industrial and business reporting enterprises
having borrowings, including public deposits, in excess of Rs.
10 crore at any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at
any time during the accounting period.
My employer is refusing to pay Gratuity, what to do?
The claim or complaints under the act shall be filed to the Controlling Authority (District Labour Officer/ Assistant Labour Commissioner's office) in form N within 90 days of it become payable.
Please click here to download form N
I am not satisfied with the work/ order of controlling authority i.e. District Labour Officer/ Labour Officer/ Labour Commissioner, what should I do?
Any person aggrieved by an order of the Controlling Authority may prefer an appeal to the Appellate Authority within 60 days from the receipt of the order.
I am a woman employee and want to exclude my husband as a nominee, what should I do?
Please apply through form E to your HR department in triplicate. One copy will be returned to you, one copy will be sent to controlling authority and one copy will be retained in your company's HR department.
Please click here to download form E
I want to modify my earlier nomination, what should I do?
Please apply through form H to your HR department
Please click here to download form H
If an employee has completed 4 years and 240 days period is he eligible for Gratuity?
Well, there is only one Madras High Court judgment in the case of Mettur Beardsell Ltd. V/s Regional Labour Commissioner (central) Madras and Others. In this judgment, the Madras High Court declared that if an employee has completed 4 years 10 months and 18 days service without break i.e. 240 days, it should be considered as completed 5 years under section 2(a), 2(b), 2(c) and 2(e) of the Payment of Gratuity Act.
Even honourable supreme court of India had given similar judgment. by virtue of the judgment of Supreme Court rendered under the provisions of the Industrial Dispute Act in Surendra Kumar Verma vs. Central Govt. Industrial Tribunal,[(1980) (4) S.C.C.433)], it is enough that an employee has a service of 240 days in the preceding 12 months and it is not necessary that he should have completed one whole year’s service. As the definition of continuous service in Industrial Dispute Act and Payment of Gratuity Act are synonymous, the same principal can be adopted under the act also and hence an employee rendering service of 4 year 10 months 18 days is considered to have completed 5 years continuous service under sec.4(2) and thereby is eligible for gratuity."
What do you mean by continuous service? If I take long medical leave, does this mean break in service?
Section 2(a) of The Payment of Gratuity Act defines as:
(2) A workman shall be said to be in continuous service for a period if he is, for that period, in uninterrupted service, including service which may be interrupted on account of sickness or authorised leave or an accident or a strike, which is not illegal, or a lock-out or on account of non-employment or discharge of such workman for a period which does not exceed three months and during which period a substitute has been employed in his place by the employer, or a cessation of work which is not due to any fault on the part of the workman.
This means it includes all approved leaves, legal strike, weekly off everything. It does not mean that you have to be present in the office for whole 365 days in a year.
I hope I am clear on this.
I have tried to cover as much thing possible as in this. Please correct for any errors and your all queries and comments are welcome.