What is gratuity ?

Gratuity is a monetary reward given to an employee for their service to the company. It is usually paid when the employee retires or resigns, provided they have worked for at least five years. It is particularly common in India and governed by the Payment of Gratuity Act, 1972

At the end of employment, employees receive this benefit, which acts as financial security after their employment ends.

Key Features of Gratuity

Statutory Benefit: Gratuity is mandated by law under the Payment of Gratuity Act, 1972, for employees who meet certain eligibility criteria.

Eligibility: An employee is eligible for gratuity if they have completed at least five years of continuous service with the employer. This period of service is waived in cases of death or disablement.

Purpose: It is intended as a reward for long-term service and loyalty to the employer, providing financial assistance post-employment.

Continuous Service: This refers to uninterrupted service, including periods of leave, absence due to illness, and other such interruptions, provided they are not in violation of employment terms.

What are the eligibility criteria for an employee to receive gratuity payment?

The eligibility criteria for the payment of gratuity in India are governed by the Payment of Gratuity Act, 1972. Here are the key criteria:

1. Employment Nature

Gratuity is payable to employees working in establishments with 10 or more employees. Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 10.

The Act applies to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments.

2. Minimum Continuous Service

An employee can receive a gratuity only if they have completed at least five years of continuous service with the same employer. This is the general requirement for eligibility.

However, In these cases, the five-year requirement is not necessary:

Death of the employee: Gratuity is paid to the nominee or legal heir irrespective of the number of years of service.

Disablement due to an accident or illness: If an employee becomes disabled and cannot continue working, gratuity is payable irrespective of the length of service.

3. Continuous Service Definition

Continuous service refers to an uninterrupted service period, including:

Authorised leave.

Periods of layoff.

Absence due to sickness, accident, or other reasons accepted by the employer.

4.Employment Termination

Gratuity becomes payable on the termination of employment in the following circumstances:

Retirement: When an employee retires from service.

Resignation: When an employee resigns after completing the minimum required period of service.

Superannuation: When an employee reaches the age of retirement as defined by the company.

Death or Disablement: As mentioned, the service period requirement is waived in these cases, and gratuity is paid immediately.

What is the formula for gratuity?

Calculating gratuities is a straightforward and effortless process, with minimal complications.

Gratuity formula:

Gratuity = No.of years * Basic salary * 15 / 26, where

In case of Monthly-rated employee -

15 days wages = termination of his employment X 15

26

What is the method used to calculate gratuity?

Let us understand the calculation with a simple example:

For instance, Mr. kelvin worked with XYZ Private Limited for 17 years and earned a basic salary + dearness allowance of Rs. 30,000 per month. The calculated gratuity will be as follows:

Therefore gratuity For the period of 17 Complete years

=15 day’s wages X 17

= Monthly wages last drawn X 15 X 17

26

= 17X 30,000 X 15 / 26

= Rs. 2,25,500/-

NOTE: Gratuity amounts vary between employers and are based on basic salary + DA. Every 6 months counts as a year only after 5 years of service. For example, 7.6 years would round up to 8 years, while 7.4 years would round down to 7 years for gratuity payment.

Maximum Gratuity 

The amount of gratuity payable should not exceed Rs 20,00,000 in any case.

Obligations Of Employers 

Every Employer is generally required to fulfil the following obligations :

1. The Employer is usually required to submit a notice of opening an establishment to the controlling authority of the area, in the prescribed form containing name and address of the establishments, employer, nature of business, etc. The employer is also required to intimate to the controlling authority if there is any change in these particulars or if he intends to close down the business.

2. The employer should correctly ascertain the amount of gratuity payable as per the provisions of the Act and pay the same accordingly. 

3. To obtain an insurance in the prescribed manner for his liability for payment of gratuity under the Act or establish an approved Gratuity Fund in the prescribed manner.

4. The employer is generally required to display following notices, at or near the main entrance of the establishment, in bold letters in English and in the local language: 

 (a) A notice specifying the name of the officer with designation, authorised to receive notice for payment of gratuity under the Act or Rules. 

(b) A notice containing an abstract of the Act and Rules, in the prescribed form (Form U).

Employers Rights 

An employer has the following rights under the Act:

1. Deducting certain amounts from an employee's gratuity, including the amount of damage or loss caused by his wilful omission or negligence. 

2. In case of termination due to riotous or disorderly conduct, violence, or moral turpitude, an employee's gratuity amount may be forfeited entirely or partly.

3. To refer to any dispute regarding the admissibility of any claim or the entitlement of a person to the controlling authority of the area.

4. To appeal an order from the controlling authority, you must submit an appeal to the appellate authority (or the State Government) within 60 days of receipt of the order.

Employees Rights

Every Employee has a right to:

1. Appoint any of his family members or any other person as his nominee, entitled to receive the amount of gratuity payable to him upon his death.

2. Claim the amount of gratuity payable in accordance with the Act.

3. Apply to the controlling authority to recover the unpaid gratuity.

4. If there is a dispute about the admissibility of a claim or who is entitled to it, refer it to the controlling authority of the area.

5. Appeal against an order of the controlling authority, to the appellate authority within 60 days of the receipt of the order.

 

A central application for gratuity by an employee

To get the gratuity, the employee must apply using Form 'I' within 30 days of it becoming payable. If the retirement date is known, the employee can apply for the gratuity form up to 30 days before retirement.

Gratuity Form - Form "I"

Following is the specimen of Gratuity Form - Form ‘I’ used for application for Gratuity by an employee

The clauses of Form 'I' for the Application of Gratuity by an employee are as follows:

1. As per sub-rule 1 of rule 7, the application of Gratuity by an employee requires the employee to mention the full name and a detailed description of the establishment with a complete address.

2. The gratuity form lies under the sub-section (1) of section 4 of the Payment of Gratuity Act, 1972, on account of employee’s retirement, superannuation or resignation after completion of the continuous services for not less than five years.

3. The form 'I' covers the statements and particulars that need to be filled by the employee during the time of their establishment.

4. The list of statements covers the following:

• Employee Full Name

• Employee Full address 

• The name of the Department/ Branch/ Section last employed

• The position held in the organisation and a ticket number or serial number, if any.

• The date of appointment.

• The date cause of termination of services

• The total period of assistance served in the organisation

• The amount of wages last claimed

• The amount of Gratuity claimed

1. After the employee has shared the details, they request the payment mode, either in cash or cross-border cheque.
2. The Form 'I' allows the employee to strike out words or paragraphs that the employee feels is not applicable.
3. The employee signs the gratuity form by mentioning the place, date, and final signature or thumb impression.

At last, after the due inspection of the statements provided by the employee, the Gratuity is granted to the employee.

Notice in Response to Employee’s Application :

In response to the employee’s application for payment of gratuity ,the employer should issue a notice within 15 days of the receipt of the Application.

The notice should specify the amount of gratuity payable and the date of payment, which should be within 30 days of the receipt of the application, if the claim is accepted.

In case a claim is rejected, the notice should explain the reasons for the rejection.

A copy of the notice should be sent to the controlling authority of the area.

If the claimant is a nominee or a legal heir, the employer may ask for such witness or evidence that may be relevant for establishing his identity and entitlement to gratuity.

Note: The notice should either be served personally or sent through registered mail.

Payment of Gratuity Act, 1972

Section 7A: Inspectors

1. The government can appoint inspectors for the purposes of this Act.

2. The government can define the area each inspector covers and distribute tasks

If multiple inspectors are in the same area.

3.Inspectors are considered public servants under Indian Penal Code, 1860.

Section 7B: Powers of Inspectors

1. Inspectors can:

• Ask employers for necessary information.

• Enter and inspect workplaces to check records and documents related to employee gratuity.

• Question employers or employees about relevant matters.

• Copy or seize documents if they believe an offence has occurred.

• Use other prescribed powers.

2. People must provide documents or information requested by an inspector, as legally required.

3. Search and seizure by inspectors follow the same rules as those under the Code of Criminal Procedure, 1973.

 

Conclusion

Understanding these criteria helps employees know when they are entitled to gratuity and under what circumstances exceptions apply. It ensures that both employers and employees are aware of their rights and obligations regarding the payment of gratuity