Gratuity limit now tax-exempt up to Rs 20 lakh post recent amendment. Key details in Section 10(10) of the Income Tax Act and CBDT Notification
Let’s see about Gratuity Eligibility Before and After Completion of 5 Years in this article!
What Is a Gratuity for Employees?
The Gratuity law was enacted in 1972, which makes a company liable for paying gratuity or an amount of money to an employee who has worked for the organisation for five years or more. The money is paid at the time of a worker’s retirement, and the sum is procured each month from his salary with the end plan of customising a beneficial retirement scheme.
Gratuity Eligibility Criteria for Employees
This is the highlighted portion of this article. Below we have listed the factual circumstances that make an employee eligible to receive his gratuity.
- The concerned employee must emerge as a fit candidate for superannuation. This factor of gratuity eligibility is calculated based on a set schedule. Superannuation transfers a fixed amount that depends on an employee’s performance. It is never affected by the business’ market performance. The amount to be given depends on criteria like the average salary of the employee during his tenure, the age of the worker when he decides to demand the benefit, etc.;
- The gratuity for employees is ready for withdrawal only when one decides to leave the company;
- The employee should consider his resignation after 5 years to avail of this monetary benefit;
- A staff/worker may claim the amount before 5 years if they suffer a physical/mental disorder occurring from illness or accidental incidents and require severe monetary aid. Otherwise, the family can get the amount of the employee who meets death during his work tenure.
Therefore, after we have gone through the above points, it is evident that gratuity for employees are claimable thoroughly once staff is under a single employer for 5 years or more. Before five years, if the employment term ends or there is any gap in the employment status, no staff can apply for the amount. It is specifically intended to help those who have already completed 4 years or more in their current job role and are considering leaving their position for a better salary structure or higher designation.
What Is the Present Gratuity Limit?
The maximum sum of money that can be credited to an employee as gratuity pay shall not exceed the limit of ₹20 lakhs by any means as per the rules laid out by the central government. This transfer of funds occurs either at the time of retirement, legal termination, or death/severe illness of the employee.
Gratuity Eligibility of an Employee with Less than 5 years in a Company?
No, they are not. Gratuity for employees involves specific rules and regulations that every worker or staff must be aware of before looking for a better opportunity outside their current company. There are definite factors that govern the deduction of gratuity amount if someone decides to call off his job position before five years of employment.
Conditions Governing 5 Years of Continuous Service
Continuous service generally refers to an uninterrupted employment tenure that begins with day 1 or hire-date of a particular employee in his current job role. Suppose a company or public organisation decides to terminate the contract of a specific employee by giving him notice and later on decide to re-offer him a position. In that case, both the work periods are not added together to calculate the continuous service period. This is an essential input that an employee should consider before he assesses the factors determining the gratuity for employees.
Insurance providers arrange for the payable amount for individuals or groups at their retirement. Initially one had to apply for the sum of money within 30 days of his/her resignation provided that already the gratuity period has matured. This scheme applies to any factory, mine, company, oil field, port, or other organisation who had hired more than 10 staff.
All the regulations follow the provisions stated in 1972’s Gratuity Payment Act. So, is a person eligible for gratuity if he has worked in a company for 4.5 years? No, he is not qualified. Recently, arguments were raised in the Madras High Court regarding whether gratuity eligibility should be granted for those who have completed a tenure of more than 240 days in the fifth year of their job term. But still, the law has not been updated, and the minimum maturation period remains to be 5 years.
Recent Modifications in the Gratuity Act
The new rules have sought to protect contract workers hired for specific contracts. Social Security provisions have been introduced for them. They are eligible for payment of a sum as a gratuity amount. Chapter 5 modified the minimum tenure of 5 years of employment and reduced it to 3 years for journalists who wish to resign.
The family members of other professionals can only claim the amount before the completion of five years if the concerned person is dead. The clauses specifying consecutive service for five years will not be valid in case of severe illness of an employee. The allowances have been limited for recruits, and by no means can it exceed 50% of his salary cap.
This has been mandated to aid the gratuity amount for staff who are seniors and have worked for more than 5 years. The new rules demanded PF contributions, conveyance allowances, bonuses, overtime payments, etc., be excluded from an individual’s salary. Thus there is a complete reorganisation of the salary structure.
The question may arise, does the law consider the notice period while counting the maturation time for gratuity? The answer is yes. Notice period falls in the last working month during which the employee is eligible for salary. The employee gets the gratuity amount based on his entire tenure ranging from his date of joining to the last active working day, so it automatically incorporates the notice period.
Forfeiture of Gratuity Payment:
Gratuity is a statutory benefit provided to employees in recognition of their long and meritorious service to an organisation. However, under certain circumstances, an employee may forfeit the right to receive gratuity.
Forfeiture may occur if the employee is terminated for misconduct or engages in any act that leads to his or her dismissal due to a violation of company policies.
Section 4 of the Gratuity Act allows an employer to withhold gratuity payment if an employee is terminated under specific circumstances:
Negligence or Wilful Omission:
If an employee is terminated due to negligence or wilful omission that results in damage to the employer’s property, the employer has the right to withhold gratuity. The amount forfeited is determined based on the extent of the damage caused by the employee’s actions.
Immoral behaviour, Misconduct, or Violent Acts:
Gratuity can be withheld if the termination is a result of the employee’s engagement in immoral behaviour, misconduct, or violent acts. This provision is in place to ensure that employees conduct themselves in a manner consistent with the ethical standards expected by the employer, and failure to do so may result in the forfeiture of gratuity.
In both cases, the Gratuity Act provides a legal framework for employers to protect their interests in situations where an employee’s actions have a detrimental impact on the company’s property or involve unacceptable behaviour. It emphasises the importance of maintaining a certain level of professionalism and ethical conduct to safeguard the employee’s entitlement to gratuity.
Gratuity Nomination:
Nomination Requirement:
Employees are usually required to designate a family member to receive the gratuity amount in the unfortunate event of their death. This is a proactive measure taken by the employee to ensure a smooth and designated transfer of the gratuity benefit.
Formal Declaration:
The nomination is a formal declaration made by the employee during their tenure with the organization. It is typically documented through a nomination form provided by the employer. The employee specifies the chosen family member who will be entitled to receive the gratuity in case of the employee’s demise.
Ensuring Smooth Transition:
By nominating a family member, the employee contributes to a streamlined and efficient process for the disbursement of the gratuity amount. This nomination eliminates ambiguity and ensures that the rightful beneficiary is aware and recognized by the employer.
Legal Significance:
The nomination holds legal significance and serves as a crucial document in the event of the employee’s death. It helps in avoiding potential disputes regarding the entitlement to the gratuity and facilitates a straightforward transfer of the benefit to the nominated family member.
Flexibility in Nomination Choices:
The nomination process often provides flexibility for employees to choose the family member they want to nominate, ensuring that individuals can make decisions based on their unique family circumstances.
In essence, the nomination process for gratuity is a proactive and formalized step taken by employees to designate a family member, ensuring that the gratuity amount is seamlessly transferred to the chosen beneficiary in the unfortunate event of the employee’s demise. This practice contributes to a more organized and compassionate handling of financial matters during challenging times.
What is the Maximum Gratuity Amount Payable to the Employee:
The determination of the maximum amount of gratuity payable to an employee is typically governed by the Payment of Gratuity Act in many countries. Here’s a detailed explanation:
Legal Framework:
The Payment of Gratuity Act outlines the statutory provisions related to the payment of gratuity to employees. It establishes the rules and guidelines that employers must follow regarding the calculation and disbursement of gratuity.
Calculation Basis:
The calculation of gratuity is commonly based on two primary factors: the employee’s last drawn salary and the number of years of service rendered to the employer. The last drawn salary often includes basic salary and dearness allowance, and in some cases, it may also include other components.
Years of Service:
The number of years of service is a crucial factor in gratuity calculation. The longer an employee has served with an organization, the higher the gratuity amount. The formula often involves multiplying a fixed factor (which may be 15 or 30, depending on the country’s regulations) by the number of years of service.
Variation in Calculation Formula:
The specific formula for calculating gratuity can vary from one country to another. Different jurisdictions may have their own rules and methods for determining the maximum gratuity amount. Employers are required to adhere to the formula stipulated by the relevant labour laws in their country.
Ceiling on Gratuity Amount:
Some countries may impose a maximum limit or ceiling on the gratuity amount that can be paid to an employee. This means that even if the calculated gratuity exceeds a certain limit, the employer is only obligated to pay up to the specified maximum amount as per the legal provisions.
Understanding and adhering to the regulations outlined in the Payment of Gratuity Act is crucial for employers to ensure compliance with labour laws and to provide employees with the rightful benefits based on their years of dedicated service. Employees, on the other hand, can refer to these regulations to have a clear understanding of their entitlement to gratuity.
Taxation on Gratuity:
Gratuity received by an employee is subject to taxation. However, there are provisions for tax exemptions based on certain conditions. In many countries, a portion or the entire amount of gratuity is exempt from income tax, depending on factors such as the employee’s years of service and the amount received.
Gratuity is a perk provided by employers to their employees, and a recent amendment approved by the Centre has elevated the maximum limit for gratuity. The new ceiling is now tax-exempt up to ₹20 lakh, doubling the previous cap of ₹10 lakh, as specified in Section 10(10) of the Income Tax Act. According to CBDT Notification no. S.O. 1213(E), dated 8 March 2019, this enhanced exemption limit of ₹20 lakh applies to employees experiencing retirement, death, resignation, or disablement on or after 29 March 2018.
Final Word on Gratuity:
Gratuity is an important employee benefit that provides financial security to employees post-retirement or in case of death. It serves as a token of appreciation for an employee’s long and dedicated service to an organisation.
Employers and employees should be aware of the legal provisions governing gratuity, including the calculation methods, maximum limits, and tax implications, to ensure compliance with the relevant laws.
It’s important to note that the specifics of gratuity regulations can vary by country, and the information provided here is a general overview. It’s advisable to refer to the specific labour laws and regulations applicable in your jurisdiction for accurate and up-to-date information.
Conclusion – Gratuity Eligibility Before and After Completion of 5 Years
The gratuity for employees is a predetermined amount credited to an employee’s registered bank account after his successful resignation or retirement from the company after a serving period of more than five years. This amount is deducted each month from the gross salary of staff. The formula for calculating the gratuity amount is given as (last salary amount) x (the number of years the concerned person has provided his service to that company) x 15/26. Here, figure 26 signifies the number of monthly working days, striking off four compulsory offs. Under certain illness conditions, the person can claim the amount even after the maturation period. Hope this blog regarding Gratuity Eligibility Before and After Completion of 5 Years was helpful.
