Objectives, Scope&coverage, Provisions, Calculation of Gratuity, Rights & duties of employer, Rights of Employee, Offenses & Penalties

1. The Payment of Gratuity
Act, 1972

2. WHAT IS GRATUITY?
 Gratuity is a sum of money paid to an employee by the
employer for the services rendered to the company.
 Gratuity is to help the workman after the retirement
monetarily.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

3. Eligibility
 5 years of continuous service in any company.
 Should not be an apprentice.
 Salary & position are not considered for being
eligible.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

4. Scope & Coverage
 Applicable to whole of India.
 The act applies to all factories, mines, oilfield, plantation, port and railway
company.
 In case of shops or establishments, it applies to those organisations with 10 or more
persons are employed on any day of the preceding 12 months.
 In case of any shop and establishment to which the act applies the number of employee
reduces below 10, it shall continue to be governed by the act irrespective of the number
of employee's.
 Nothing in this act applies to Apprentices and Persons who hold civil posts under the
Central Government or State Government and are subjected to any other act or rule
other than this act.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

5. Other establishments
 Hotels
 Educational institutions
 NGO
 Clubs
 Chamber of Commerce & Industrial Associations.
 Branches of same companies
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

6. Payment of Gratuity
 Only at the Termination of services after 5 years of
experiences in case of ,
 Retirement
 Retrenchment
 Superannuation (58 -60)
 Layoff
 Disability (due to accident/ disease)
 Resignation
 5 years of service is not required in case of Death.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

7. Continuous service
 Uninterrupted service means, (not a fault of worker)
 Sickness
 Layoff
 Strike
 Lockout
 Maternity
 Mines/ other establishments have 6 days of work in a week, Minimum service
by a worker 190 days in a preceding year/ 95 days in preceding 6 months.
 Other establishments, Minimum service by a worker 240 days in a preceding
year/ 95 days in preceding 6 months.
 For seasonal establishments, at least 75%.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

8. How is gratuity calculated?
 Gratuity is dependent upon the total number of years served in the
company and the last drawn salary.
 Gratuity = Monthly salary X 15 X No. of years of service
26
 Anitha has worked for Assistant HR for 10 years and her last drawn
salary (Basic + Dearness Allowance) is Rs 30,000.
 Hence Anitha’s gratuity amount would be – 10*30,000*15/26 = Rs 1,73,076
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

9.  According to this formula, the time period of over six months or
more is considered as one year.
This means if you have completed 5 years and 7 months of service,
the number of years would be considered as 6 years for calculation
of gratuity benefit.
On the other hand, if the service period is 5 years and 5 months, for
gratuity calculation it will be considered 5 years.
 Maximum Gratuity amount is Rs. 20 Lakh. (According to 7th Pay
Commission).
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

10. Taxability of Gratuity Amount
 Income Tax Treatment of Gratuity
For government employees, entire amount of gratuity received on
retirement or death is currently exempted from income tax.
In case of non-government employees, income tax rules on gratuity are
applicable depending on whether employees are covered under the
Payment of Gratuity Act, 1972 or not.
 Non-government employees can also get a Tax exemption on
their gratuity amount. Although, there is an upper limit of Rs
10 lakhs for the tax concessions.
 In the recent Interim Budget of 2019, interim finance
minister, Mr. Piyush Goyal announced that the existing
tax-free gratuity limit will be increased to Rs.30 lakh.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

11. For non-government employees covered
under the Gratuity Act,
 the income tax exemption on any gratuity received is least of
the following:Maximum amount specified by the government
which is currently Rs. 10 lakh
 Last drawn salary X 15/26 X years of service
 Actual gratuity received
 For example, the last drawn salary (basic plus DA) of Mr
Ashish, for example, is Rs. 60,000 (per month) and he has
worked for 25 years. The gratuity according to the formula is
Rs. 8.65 lakh but suppose he has actually received gratuity of
Rs. 12 lakh.
So for income tax calculation, Rs. 8.65 lakh will be considered
for exemption. So Mr Ashish will pay tax on Rs. 3.35 lakh (Rs.
12 lakh - 8.65 lakh).
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

12. For non-government employees not
covered under the Payment of Gratuity Act

the income tax exemption on any gratuity received is least of the
following:Half month's average salary for each completed year of service
 Maximum amount specified by the government which is currently Rs. 10
lakh
 Actual gratuity received
 (Average monthly salary is to be computed on the basis of average of
salary for 10 months immediately preceding the month (not the day) of
retirement)
 For example, the last drawn salary (basic plus DA) of Mr Bhupesh, for
example, is Rs. 70,000 and he has worked for 35 years. The gratuity
according to the formula is Rs. 12.25 lakh and he has received this amount
as gratuity. For tax purposes, Rs. 10 lakh would be considered as exemption
limit as it is the lowest of the three factors. So Mr Bhupesh will have to pay
tax on Rs. 2.25 lakh (Rs. 12.25 lakh - Rs. 10 lakh).
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

13. Claim for Gratuity before 5 years
 An employee can claim gratuity before completion of 5 years
only in two instances i.e
 occurrence of death
 occurrence of disability due to illness or accidents.
 In the instance of Death the claim would be transferred to the
assigned nominee.
 Spouse, Children (Married/Unmarried)
 Dependent parents/ Dependent parents of spouse/widow
 Changes in nominations is valid.
 If no nominee, payment will go to heirs.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

14. Time limit for Payment
 The government mandates employers to pay the gratuity
amount within 30 days.
 Usually, the gratuity is released along with the full and final
settlements of the employee.
 If there is a delay in payment, the employer has to pay a
simple interest (10%) on the amount from the due date until
the payment is made.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

15. Mode of Payment
 Cash
 Cheque/ DD
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

16. COMPULSORY INSURANCE
 Every employer, other than an employer or an establishment belonging to,
or under the control of, the Central Government or a State Government,
should obtain an insurance, for his liability for payment towards the
gratuity under this Act, from the Life Insurance Corporation of India or any
other prescribed insurer.
 Employer who had already established an approved gratuity fund in respect
of his employees shall be exempted from above rule.
 Employer who abstained insurance from LIC or other from payment of
gratuity shall within such time as may be prescribed get his establishment
registered with the controlling authority in the prescribed manner. no
employer shall be registered under the provisions of this section unless he
has taken an insurance.
 Every employer must pay the premium to the insurance company
insurance for his liability for payment towards the gratuity or contribution
to approved gratuity fund. If employer fails to make any payment he shall
be liable to pay the amount of gratuity due (including interest, if any, for
delayed payments)
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

17. Deductions/ Forfeitures
 Willful omission or negligence causing any damage or loss to,
or destruction of, property.
 Employee have been terminated for his riotous or disorderly
conduct or any other act of violence.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

18. Obligations Rights
 Intimate the particulars of the
company to the Controlling
Authority such as
 Name & address of the
company & employer
 Nature of business
 Ascertain the Gratuity amount
& Pay accordingly
 To obtain Insurance
 Display notices (controlling
officer & Abstract of the act)
 To forfeiture amount
 To deduct amount
 To refer dispute to controlling
authority
 To appeal against the order to
appellate authority
Employer
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

19. Rights of Employees
 Appoint nominees
 Claim the Gratuity amount
 Apply the controlling officer regarding non-
payment/refusal/ delayed payment
 Appeal against the order to Appellate authority.
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR

20. Offences & Penalties
Offence Penalty
Fail to obtain Insurance Fine: Rs. 10,000 (Rs. 1000 for each
day)
False statement Jail up to 6 Months. Fine up to Rs.
10,000
Contravention Jail up to 1 year (Min: 3Months). Fine
up to Rs. 20,000 (Min: Rs.10,000)
Non-payment Jail up to 2 years (Min: 6Months). Fine
up to Rs. 20,000 (Min: Rs.10,000)
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Dr. M.Jothilakshmi, VVVCOLLEGE, VNR