Gratuity Laws in India: Who is Eligible and How to Claim?
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Gratuity Laws in India: Who is Eligible and How to Claim?

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The concept of employee benefits has evolved over time, and one of the most significant provisions in Indian labour law is gratuity. Historically, employees in India worked long hours in factories or shops with little to no security for their future. Recognizing the need for financial protection for long-serving workers, the central government 1972 recognized the condition of workers in 1972 and introduced the Payment of Gratuity Act 1972. Gratuity came with the objective of rewarding employees for their dedicated service to an organization, offering them financial security when they retire, resign, or face unfortunate circumstances like death or disability. Over the years, gratuity has become a vital part of employment in India that ensures that employees receive recognition and support for their contributions. In this blog, we will go into depth about gratuity laws in India, eligibility criteria, and the process of claiming gratuity.

What is Gratuity?

Gratuity is a monetary benefit given by an employer to an employee as a token of appreciation for their services after a certain number of years. It is governed by the Payment of Gratuity Act, 1972, India.  The act applies to all establishments that employ 10 or more employees. Gratuity is payable when an employee leaves a company due to retirement, resignation, death, or disability, provided they meet the eligibility conditions.

In India, gratuity acts as a retirement benefit that offers financial security to employees who have contributed their time and efforts to an organization. It is a form of recognition for long-term service and helps employees financially after they leave the workforce.

The Payment of Gratuity Act, 1972

The Payment of Gratuity Act of 1972 is the primary legislation that governs the payment of gratuity in India. The gratuity is payable to employees who have completed five or more than five years of continuous service with the same employer. The law applies to:

  1. Factories,
  2. Shops,
  3. Establishments,
  4. Institutions with 10 or more employees.

Key Features of the Payment of Gratuity Act, 1972

  1. Applicability: The act covers establishments with 10 or more employees, including organizations, factories, shops, and commercial establishments.
  2. Eligibility: Employees who have worked for at least 5 years in an organization are eligible to receive gratuity. Employees who leave their jobs due to death or permanent disability are also eligible, even if they have not completed five years.
  3. Payment: The gratuity amount is calculated on the basis of the last drawn salary by the employee and the number of years of service.
  4. Maximum Limit: As per the latest amendment, the maximum amount of gratuity an employee can receive is capped at Rs. 25 lakhs.

Who is Eligible for Gratuity?

1. Employees of Government Establishments

Employees working in government organizations are entitled to gratuity benefits under the provisions of the Central Civil Services (Pension) Rules, 1972, and not under the Payment of Gratuity Act. However, the principle remains the same — the employee must have rendered continuous service for at least five years to claim gratuity.

2. Employees of Private and Public Sector Enterprises

Employees working in private and public sector organizations, including defence and local governing bodies, are entitled to gratuity under the Payment of Gratuity Act. The eligibility is governed by the same principle: employees who have completed a minimum of five years or 240 working days of continuous service are eligible to receive gratuity. The employee will receive gratuity:

  • Upon resignation or retirement
  • In the event of the employee’s death (in which case the legal heirs are entitled).
  • Permanent disability leading to the cessation of employment.
  • Termination
  • Lay off due to retrenchment

3. Employees Dismissed or Terminated

Under the Payment of Gratuity Act of 1972, an employee who is dismissed or terminated for reasons such as misconduct is not eligible for gratuity payment. However, if an employee resigns voluntarily or is terminated due to genuine reasons (like an accident or disability), they may still be entitled to gratuity.

4. Employees in Family-run Businesses

Employees working in family-run businesses are entitled to gratuity as well, provided the organization employs more than 10 employees and the employee completes five continuous years of service.

5. Employees of Small Establishments

If a small establishment or business has fewer than 10 employees, it is not legally required to pay gratuity. However, if the employer decides to offer it, the terms and conditions will vary based on the employer’s discretion.

How to Calculate Gratuity?

Gratuity is calculated based on the formula provided under the Payment of Gratuity Act of 1972. The formula is as follows:

Gratuity Calculation Formula:

Gratuity = (Last drawn salary × Number of years of service × 15) / 30

Where:

  • The last drawn salary means the basic salary plus dearness allowance (if applicable).
  • Number of years of service is the duration of the employee’s continuous service with the same employer.

Example:

Suppose an employee has worked with an organization for 10 years and their last drawn salary (basic + DA (Dearness Allowance)) is Rs. 50,000 per month. The gratuity will be calculated as:

Gratuity = (50,000 × 10 × 15) / 30 = Rs. 2,50,000

Thus, the employee will be entitled to Rs. 2,50,000 as gratuity.

Important Points Regarding Gratuity Calculation

  • If an employee works for a period of less than six months, the employer may consider it as a full year for gratuity calculations.
  • For periods of service that are not a full year but more than six months, the employer may round off the years of service to the next full year.

Procedure to Claim Gratuity in India

Only a few steps are involved in claiming gratuity in India. The step-by-step guide is as follows:

Step 1: Check Eligibility

Before claiming gratuity, ensure that the employee has completed at least five years of 240 days of continuous service. If the employee is leaving the organization voluntarily (i.e., resignation), the employer has the discretion to approve the claim.

Step 2: Submit a Formal Application

The employee must submit a written application to the employer requesting the payment of gratuity. This application must include the following details:

  • Full name and address of the employee.
  • Employee’s designation.
  • Date of joining and date of leaving the organization.
  • Reason for leaving the company.
  • A request for gratuity payment.

Step 3: Employer Verification

The employer will verify the employee’s application for gratuity, including employment records, joining date, last drawn salary, and reason for departure. If the employee has met all conditions, the employer is obligated to calculate and approve the gratuity amount.

Step 4: Gratuity Payment Approval

Once the employer approves the payment, they will issue a payment order to the employee. The payment process may take up to 30 days after receiving the application. In case of any disputes, the matter can be referred to the Controlling Authority under the Payment of Gratuity Act, 1972, which is the Labour Commissioner of the region, popularly known as the Presiding Officer in the Labour Court.

Step 5: Disbursement of Gratuity

The gratuity amount is disbursed to the employee after approval by the employer. The employer must pay the gratuity amount within 30 days of the application. If the employer delays the payment, it is liable to pay interest on the gratuity at a rate fixed by the government.

Step 6: Dispute Resolution

If the employee is not satisfied with the gratuity amount or the delay in payment, they can file a claim with the Controlling Authority. The Controlling Authority will investigate the dispute and take appropriate action.

Taxation of Gratuity

Gratuity paid to an employee is exempted from tax under Section 10(10) of the Income Tax Act, provided the amount does not exceed the maximum limit of Rs. 20 lakhs.

  1. Gratuity is tax-free, up to Rs. 20 lakhs for employees working in private organizations.
  2. For government employees, gratuity is entirely tax-free.
  3. If the gratuity amount exceeds the tax-free limit, the excess amount is subject to tax under the Income Tax Act of 1961.

Related Service

Frequently Asked Questions (FAQs)

  1. Can an employee claim gratuity if they leave the organization voluntarily?

Yes, an employee can claim gratuity if they have completed five or more years of continuous service with the organization, even if they resign voluntarily.

  1. Is gratuity applicable to contractual employees?

Yes, contractual employees are eligible for gratuity under the Payment of Gratuity Act, provided they meet the conditions for eligibility.

  1. What happens if an employer refuses to pay gratuity?

If an employer refuses to pay gratuity, the employee can approach the Controlling Authority for assistance.

  1. Is gratuity taxable?

Gratuity is tax-free, up to Rs. 20 lakh for private employees and completely tax-free for government employees.

  1. How long does it take to receive gratuity after applying?

The employer must pay the gratuity within 30 days of receiving the application.

  1. Is gratuity payable to family members after an employee’s death?

Yes, if an employee passes away before claiming their gratuity, the family members or legal heirs are entitled to receive it.

  1. Can an employee claim gratuity if they have worked less than five years?

No, employees are only eligible for gratuity after completing five years of continuous service unless the reason for departure is death or disability.

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