This article briefs about the gratuity provisions for employees by the virtue of the Gratuity Act,172. It mentions the reasons for forfeiting gratuity by an employer.

Overview:

Gratuity has been conventionally defined as a huge lump sum of money given to an employee as an incentive from the organisation for being in service and loyalty in the event of retirement or job change. The Government of India recognizes the granting of gratuity rules applicable only to those that have served with the employer for more than 5 years in the private sector and 10 years in the public sector. It acts like a benefit that acts as a post-retirement plan and a great aid in sustaining workers/ staff members/ working hands who aren’t left with any fixed source of monthly income like before. 

What is Gratuity?

The Payment of Gratuity Act 1972 mandates employers to provide a monetary benefit known as gratuity to employees as part of their salary for their tenure in the company. Notably, this benefit is exclusively extended to employees with a minimum service period of five years within the company.

Income Tax and Gratuity 

• Public sector employees, excluding statutory corporations, receive tax-exempt gratuity
• Employees under non-Act-covered employers enjoy tax exemption on the minimum of: ₹10 lakh, actual received gratuity, or half-month salary per year of service
• Employees under Act-covered employers receive tax exemption on 15 days’ salary based on their last drawn salary as per the Payment of Gratuity Act.

Types of Gratuity Forms 

• Application Form for Gratuity (Form I)
• Nominee’s Application for Gratuity (Form J)
• Legal Heir’s Form for Gratuity (Form K)
• Nomination Form (Form F)
• Addition of Fresh Nominee (Form G)
• Modification of Nomination (Form H)
• Employer-Issued Gratuity Confirmation (Form L)
• Employer-Issued Gratuity Rejection (Form M)
• Employee’s Application to Labour Commission (Form N)
• Authority’s Hearing Appearance Request (Form O)
• Authority’s Hearing Summons (Form P)

Gratuity Act, 1972- Guidelines and Importance: Who Is Eligible for Gratuity after Their Service Term?

• The gratuity applies only to those that have served with the employer for more than 5 years in the private sector and ten years in the public sector. 
• However, this condition is not considered in situations of demise or disablement of an employee.
• The government of India introduced gratuity under the Payment of Gratuity Act 1972. 
• All central and state government departments, defence, and local governing bodies are covered under this act. 
• Private organisations can come under its purview subject to fulfilment of certain conditions.

Gratuity isn’t only paid upon retirement, but as per the gratuity rules, an employee will be eligible to avail gratuity upon –

• Retirement.
• Resignation.
• Demise.
• Disablement due to an accident or a disease.
• VRS- voluntary retirement scheme 
• Termination.
• Lay off due to retrenchment.
• Additionally, upon an employee’s demise, the gratuity paid to his widow or legal heir for the number of years he has worked with the company, regardless of the tenure of his service, will be exempt from tax. 
• Any ex-gratia payment made to an employee or his legal heir on account of an injury caused, physically challenges due to some illness or mishap will also be tax-free.

Gratuity Rules for Employers

• Employers cannot refuse to pay gratuity even during bankruptcy – an organisation is liable to pay gratuity for employees even if it declares bankruptcy. 
• A gratuity of up to Rs.20 Lakh, the earlier threshold of tax-exempted gratuity paid was ten lakhs, paid by organisations covered under the Payment of Gratuity Act, 1972, is exempt from tax as per the gratuity rules 2021. 
• This applies to associations other than central and state government departments, defence, and local governing bodies.

Right to Gratuity for Employee

The right of an employee to claim gratuity does not leave any discretion in the hands of the employer to make payment of gratuity dues to an employee at his own will. It has to be mandatorily paid, and failure may even invite legal repercussions and prosecution for the employer.

• Continuous service for 190 days, demands compensation with gratuity lump-sum post-retirement or superannuation or death
• Payment of Gratuity in cases of mergers and transfers
• an employer is bound by clause of this Act and cannot deprive or abandon his employees of the benefits that have accrued to them because of past services, who happen to finish their five years tenure after the merging or transfer, (i.e., merely by transferring his business to another person or to another limited company

Under What Circumstances Can an Employer Withhold the Gratuity of an Employee

Besides safeguarding the interests of an employee, the Gratuity act also lets the employer exercise control over the partial or whole gratuity amount to be paid, in the event of grave misconduct or damage caused by the employee to the belongings of the employer and others. The gratuity of an employee whose services are being considered to be terminated on the accountability of an act of wilful omission/negligence causing any damage or loss to, or destruction of, property belonging to the employer shall be forfeited to the extent of the damage or loss/vandalisation so caused

The Gratuity Payable to an Employee May Be Wholly or Partially Forfeited if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or  if the services of such employee have been terminated for any act which constitutes an offence involving debauchery/ turpitude/ degeneracy or lewdness, provided that the offence taken in regard has been committed during the tenure of his employment. Pre-requisite for Forfeiture of Gratuity of an Employee by an Employer the damages suffered by the employer should be quantified  principles of natural justice must be adhered to, and the concerned employee must be given an opportunity to being  the employer must pass an order to forfeit the gratuity, whole or partial, following law and its legal proceedings.

An Employer Can Forfeit the Gratuity of Its Employees but Only After

• due deliberation and compliance with the provisions of the Act 
• non-compliance or derogation which may attract a penalty on the employer himself.

On the one hand, the Gratuity Act has recognised the employer’s right to forfeit gratuity payments. Still, on the other hand, it attempts quite reasonably to strike a balance by controlling and limiting the power of the employer to avoid the abuse of the same, too.

Imposition of Penalty for Wrongfully Withholding/ Forfeiture of Gratuity

In case, the employer decides to withhold the lump sum after the tenure of service or the demise of an employee from the legal heir or widow, he may be legally charged for depriving a worker of his well-deserved post-service remuneration which he/she is entitled to through law. The employer cannot exercise forfeiture of gratuity at whim or without legal proceedings involving substantial proof of damage to property or business by the employee. Any failure to make payment of gratuity dues is punishable with imprisonment for not less than six (6) months and which may further be extended to two (2) years.

FAQs

Can Gratuity be forfeited?

Gratuity can be forfeited if an employee is terminated due to disorderly conduct, such as violence or moral misconduct, as defined by the company's rules, provided it's explicitly stated in the employment contract.

What are the new rules for Gratuity in 2023?

As of 2023, the government hasn't introduced specific new rules for gratuity. However, changes in tax regulations or amendments in employment laws could potentially impact gratuity calculations or eligibility criteria.

What is the rule for Gratuity withdrawal?

Gratuity can be withdrawn by an employee upon retirement, resignation, or after completion of at least five years of continuous service with the same employer, as per the Payment of Gratuity Act, 1972, subject to specific conditions.

Can gratuity be reduced?

Gratuity amount, once determined as per the Act, cannot be reduced, except in cases where an employee has caused financial loss deliberately and as specified by the company's terms, leading to lawful recovery from their gratuity entitlement.

Which are the circumstances under which gratuity is not payable?

Gratuity may not be payable if an employee is terminated for misconduct leading to significant financial loss, or if they have served for less than five years (unless in the case of death or disability during employment).

Can a company stop gratuity in India?

A company cannot withhold gratuity unlawfully. However, it can be forfeited under specific conditions, like termination due to gross misconduct as per company rules or if an employee serves less than five years without meeting exceptions outlined in the Act.

Conclusion

Savings are essential, and today’s generation strikes a balance between spending and saving wisely.  Such rights are related to retirement plans that make one cash-rich and solid in their frail days. Gratuity is one such benefit meant to bring stability and security in old age or in families devastated by the loss of a breadwinner. Individuals must be aware of these new gratuity rules to ensure that they can maximise their benefits from this aspect attached to their employment terms.

Helpful Links:

• Eligibility Criteria for Gratuity
• How to calculate Death Gratuity?
• Income Tax Exemption for Gratuity
• Extent of Gratuity Can Be Forfeited