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Wednesday, June 26, 2013

Question and answer about gratuity- for employee as well as employer

Friends,

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
= 98077

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:
https://www.dropbox.com/s/lm2p5nn9msfmghe/paytofgratuity_%20FORM%20A.doc
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:
https://www.dropbox.com/s/3ukyxdsqclrm65t/paytof_gratuity_FORM_B.doc

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:
https://www.dropbox.com/s/1m0x7nh875t9c9o/Gratuitynomination.pdf

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.


Is it mandatory to create Gratuity Trust? If yes, where and how?
No, however to get benefit of Tax exemption and also to start a Gratuity Insurance the Trust is mandatory. Please note that Gratuity Trust is not a public trust. It is a trust approved by Income Tax Commisioner of your circle under whose jurisdiction you fall. Company should nominate 3 trustees who should not be directors of the company or its family members. You need to create a trust deed and submit to commissioner for approval. Then, you need to submit the trust deed to LIC for opening account. For every changes in the trust deed, you need to take approval from concerned income tax commissioner. 


Why it is good to have Gratuity Insurance
Gratuity is payable only in case employee completes minimum 5 years of service. However in case of death of an employee, the rule of completing 5 years is not applicable. This means the Gratuity is payable. The sum payable is very high. Ideally the wages for death or permanent disability should be considered on the basis of  average increase in basic salary per year. Here, we will take example on last earning basic salary. We will again take same example of 17000 as a basic salary. 

Employee's date of Birth: 01.01.1988

Current monthly basic salary: 17000

Date of appointment: 01.01.2010

Retirement age as per appointment letter : 58 years

Current age: 25 years

Date of death of the employee: 30.11.2012

Total no. of years of service left: 58-25 = 33

Gratuity payable: 17000/26 X 15 X 33= 323654

Now suppose if somebody has basic salary of 51000 per month, in that case, the Gratuity will cross 10 lakhs and as per the maximum ceiling, employer is still bound to pay Rs. 10 lakhs. Hence it is always better to have a policy in place. 


What are the penalty for not complying with the Payment of Gratuity Act 1972
(i)Avoiding any payment or enabling any other person to avoid such payment or makes any false statement.                                                                 
Penalty: Imprisonment which may extend to six months or with fine which may extend to ` 10,000/- or with both

(ii)Contravenes or makes default in complying with the provisions of the Act or any Rules
Penalty: Imprisonment which not less than 3 months but may extend to 1 years or with fine not less than ` 10,000 which may extend to ` 20,000/- or with both

(iii)Non-payment of gratuity
Penalty: Imprisonment which not less than 6 months but may extend to 2 years or with fine which may extend to ` 10,000/- or with both

From where to get extract of the Act?
You can get it from the local stationary store where labour books are available.


___________________________________________________________

Now following information is more useful for employees

Can an organisation deduct gratuity payment under any reason?
Not in all case. No gratuity payable under the Act shall be liable to attachment in execution of any decree 
or order of any civil, revenue or criminal court. However if the employee had agreed to a deduction from the amount due as gratuity then that amount can be recovered. (Jaganatha Dasik v Bina Khadi & Village Industries Board 1995 Lab. IC 923. (Sec. 13)

However, in following case, it can be forfeited under section 4(6):
(i) for any act, willful omission or negligence causing any damage or loss to or 
destruction of any property belonging to the employer, to the extent of such loss or 
damage. 
(ii) for riotous or disorderly conduct or any act of violence on his part. 
(iii) For any act which constitutes an offence involving moral turpitude, provided the 
offence has been committed by him in the course of his employment.


What is the procedure to get Gratuity if I am eligible?
Following is the procedure:
(i) Submit Application in form I by employee or Application in form J by nominee (If employee is not alive) or Application in form K by legal heir(if employee is not alive).





(iii) Submit the application to the employer within 30 days from the date of it becomes payable. The employer shall pay the gratuity within 30 days from the receipt of the application. For belated payment the employer is liable to pay 10% simple interest also.


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. 




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Author: Govind Sharma

Govind is a working human resources professional and has experimented with Indian education system a lot with extensive ecxperience and knowledge. He is providing career coaching, career guidance, career management, distance education, how to choose a right course, how to plan career and also advising in fraudelant activities of organisation Simply Career- Nothing is important than your career. You may learn more about him here →

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Revathi said...

In one of your post I have read when the employees are transferred from one establishment to other by the same employee, the service should be considered as continuous. I could not trace any concrete source for this interpretation. Can you please explain what was the basis for the same, since the act is silent.

Hi,
By just transferring department and location does not change the employment status hence even if you get transfer from same employer to other department and other designation, it is termed as a continuous service.
Please refer section 2(a) of the Gratuity Act
Section 2A in The Payment Of Gratuity Act, 1972
2A. 2[ Continuous service.- For the purposes of this Act,--
(1) an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order 3[ treating the absence as break in service has been passed in accordance with the standing orders, rules or regulations governing the employees of the establishment), lay- off, strike or a lock- out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act;
(2) where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer--
(a) for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than--
(i) one hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case;
(b) for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than--
(i) ninety- five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) one hundred and twenty days, in any other case; 3[ Explanation.-- For the purposes of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which--
(i) he has been laid- off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 (20 of 1946 ), or under the Industrial Disputes Act, 1947 or (14 of 1947 ), under any other law applicable to the establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and
(iv) in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed twelve weeks.]
(3) where an employee, employed in a seasonal establishment, is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for such period if he has actually worked for not less than seventy- five per cent. of the number of days on which the establishment was in operation during such period.]

Even the Industrial dispute Act has similar definition.

swati said...

if an employee dies after completion of more than 5 yrs of service, then while calculating his gratuity, should we give it for 5 completed yrs as well as remaining yrs upto his retirement and make a sum of it?

Hi,
There is no specification mentioned in the Payment of Gratuity Act, however the standard norm followed is as following:

DEATH GRATUITY
The amount of Death Gratuity shall be as under:-

Length of Qualifying Service
Rate of Death Gratuity
1.
Less than one year
2 times
Of reckonable emoluments.
2.
One year or more but less than 5 years
6 times
3.
Five years or more but less than 20 years
12 times
4.
20 years and more
Half of reckonable emoluments for each completed six monthly period of qualifying service (including weightage of 5 years ) subject to a minimum of 12 times of reckonable emoluments and a maximum of 33 times of reckonable emoluments, provided that the amount of death gratuity shall in no case exceed the ceiling limits prescribed by government of India from time to time.

I hope this is helpful. Both the defence and state government follow this pattern.

TopguN said...

can a person claim gratuity, if he has been shifted to another company within group of company, if yes can you please provide a case law for the same, or any thing related to situation of change in management

very informative.... thank you.

Hi,

Good question.
The payment f Gratuity Act is silent about this and it is employer who may decide.
As per the companies Act, although the management is same, for each company the management is responsible and accountable separately, therefore you will have two different gratuity account. The employee has to claim Gratuity separately.
In my previous organisation, I was trustee for Gratuity Trust for 3 different companies of the same group of directors (Family managed but a pvt. company registered under companies Act). Many people were transferred from one company to another as management wanted to shut the old company. Employees were transferred and their gratuity withdrawn then a new Gratuity account was opened in a new company. This is the normal practice.
Yes, Gratuity Act need to be amended to protect employee's interest in such cases.
However, if the people working in such organisation object the transfer, no way the organisation can do it. consent must be there. The following case is not particularly related to Gratuity rather related to industrial law jurisprudence in relation to Workmen's right (please note, every employee is not a workmen under industrial dispute Act). You may refer this where supreme court has laid down certain conditions while transferring employee/ transferring right of onwership
Sunil Kr. Ghosh v. K. Ram Chandran, Civil Appeal Nos. 9921-9922 of 2011 arising out of SLP (C) Nos. 11115-11116 of 2009 (the “Judgment”)
I could not find a specific judgment where such complexity has arisen.

Anshul Shah said...

hello i work in a partnership firm having more than 40 employees in mumbai it is engaged in the sale of diamonds . Am i entitled to gratuity

Rakesh P said...

I am working for ABC company for 9 years & now that company has been purchased by another one. So the management has changed. Will I be entitled to get gratuity?

kaveri1987 said...

Hi, Please let me know if there is a change on trustee of gratuityy fund then whether for that approval of Income tax commissioner is red

yes, it is mandatory

kaveri1987 said...

Hi. Thanks. Is there any specific provision for this. Also are there any relev.ant case laws.
As per Income Tax Rule 110, it is provided that approval has to be obtained if there is any amendment to the rules, constitution, objects or conditions. Change of trustee will fall in which category and why.

Thanks & Regards

kaveri1987 said...

Hi, Is there a specific provision & case law on this. Income Tax rule 110 only provides that approvals is reqd to be taken if there is change in rules, constitution, objects or conditions of the trust. Change in trustee shall fall in which of these.

Under constitution as well as condition. While working for my previous organisation, I had to go through this process.

kaveri1987 said...

Hi,

Many thanks for this. However, am wanting case laws/commentaries/interpretations to substantiate this.

 
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