In this article, we will learn all that we need to know about gratuity rules in India and the new gratuity policy.
Employers express gratitude for the performance provided by giving their employees a lump sum amount known as a gratuity. The payment of the new gratuity rules passed in 1972, imposes certain regulations. The act was passed by Parliament on August 21 and went into effect on September 16 of the same year. This act applies to all departments of the central, state, and local governments as well as the defense and local governing bodies. Private organizations can come under its purview subject to the fulfillment of certain conditions. It is a financial incentive given to an employee in recognition of his service and loyalty to the business.
What Is The New Gratuity Rules?
The following new gratuity rules are listed regarding the use of gratuities:
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Gratuity Must Be Paid if an Organisation Employs 10 or More Individuals
Companies that have 10 or more employees on a single day over the previous 12 months are required to pay gratuity. According to the payment of the new gratuity rules, if a company’s employee count falls to less than 10, it must still pay the gratuity.
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Calculation of Gratuity Is Covered Under This Act
As we know, companies with 10 employees on a day in the foregoing 12 months are covered under this act.
No other part of the last drawn salary will be included; it consists only of the basic salary and the dearness allowance (DA).
A completed year of service is any year in which an employee worked for longer than six months.
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Gratuity Can Be Paid Before Retirement
New Gratuity Rules – In general, gratuity is paid after retirement, however, there are some circumstances in which it can be given beforehand. These reasons include:
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- After completion of 5 years of employment, one can request a gratuity upon changing jobs.
- The nominee or legal heir will receive the gratuity payment if an employee passes away while on the job.
- When an employee becomes disabled due to an illness or an accident, they are entitled to gratuity.
- If an employee chose VRS, he or she is entitled to a new gratuity policy.
- Although a gratuity is due even after the employee’s job period ends, they cannot receive one in the event of termination due to misconduct such as fraud, theft, assault, rape, or molestation.
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A Legal Heir or Widow of an Employee Who Receives a Gratuity Will Not Be Taxed
When an employee passes away, the gratuity given to his wife or other designated legal heir is tax-free. The gratuity benefits are determined based on the employee’s duration of employment in the event of death. However, the amount is fixed to a maximum of ₹20 lakhs.
New Gratuity Rules: Tax-Free Gratuities Upto ₹20 Lakhs
Any gratuity that government employees receive, except statutory businesses, is completely tax-exempt under Article 10(10) of the Income Tax Act.
According to the Gratuity Rules 2021, gratuities paid by organisations covered by the Payment of Gratuity Act, 1972, up to a total of ₹20 lakh, are exempt from taxation. Additionally, gratuities made by central, state, and local governments are also exempt from taxation.
Vakilsearch offers a retirement planning calculator which can assist you in estimating the amount of funds you’ll require to secure your post-retirement life, manage your expenses, and achieve your desired lifestyle.
Employers Cannot Deny Paying Gratuity to Their Employees Even at the Time of Bankruptcy
Even when an organization declares bankruptcy, the employees must still get gratuities, and no court ruling can prevent an employee from receiving gratuities. However, the new gratuity policy for 2023 is different from the earlier one.
The circumstances in which employees are entitled to gratuities are described in the sections below.
- When the employee has served continuously in the relevant organisation for 5 years
- When a worker retires, they can get their gratuity.
- An employee dies, suffers an illness, has an accident, etc.
- An employee must be qualified for superannuation, a scheme in which the money employees deposit grows tax-free up until retirement or withdrawal.
Key Insights on Gratuity Payment Rules Act 1972
- The Gratuity Payment Rules Act,1972 provides a monetary reward, called gratuity, to employees for their service
- The employer is responsible for paying gratuity
- Employers must pay a gratuity amount to employees
- Gratuity is part of the cost to the company (CTC) for an employee
- Income tax is applicable to gratuity payments as it is considered part of the salary.
What is the Payment of New Gratuity Policy of 1972?
According to the Indian Gratuity Act, of 1972, companies are required to give retired workers a one-time gratuity.
This covers all industries, including mines, railways, ports, factories, and oil & gas fields. Section 4 of the Payment of Gratuity Act, 1972 states that the gratuity is paid to employees who fall under the definition of “employee” as stated in section 2(E) of the act.
The employee’s service should have lasted more than six months or a partial year, and the gratuity comprises 15 days’ worth of pay for each year.
Enforcing this law primarily serves the purpose of giving employees social and financial stability upon retirement. The amount of the gratuity is based on both the last income received and the number of years of service with the company.
Vakilsearch offers a Retirement Planning Calculator which can assist you in estimating the amount of funds you’ll require to secure your post-retirement life, manage your expenses, and achieve your desired lifestyle.
New Gratuity Rules Payment Procedures
There are three steps to paying a gratuity:
- An employee or authorised person should submit a gratuity application to their employer.
- The company computes the gratuity amount and notifies the applicant and the controlling authority of the same.
- The employer has 30 days to pay the applicant’s gratuity.
Gratuity New Rules
On July 1, 2022, the new labour law went into effect for all businesses and organizations. The working hours, Provident Fund (PF), and in-hand salary were decreased in accordance with the new labour law. This law will have the most effect on take-home wages.
According to the new gratuity rules, employers must make sure that base pay makes up 50% of an employee’s CTC (cost to the company) and that the remaining 50% is made up of overtime, housing costs, and employee allowances. And if the company pays any additional allowances or exemptions that exceed 50% of the CTC, it will be regarded as remuneration.
According to the new gratuity rules guidelines, the law limits the maximum basic pay to 50% of CTC, which will increase the gratuity bonus that must be provided to employees. The gratuity amount will be determined on a large salary base that includes basic pay and allowances.
When an employee works overtime such as working for 15 minutes or more, they are paid.
Conclusion
New Gratuity Rules – To sum up, gratuity serves as a post-retirement plan for employees, which is why it is so important. These gratuity regulations should be understood in detail by employees in both the public and private sectors. This will help ensure that you can make full use of them and get what you deserve. Vakilsearch provides you with a gratuity calculator which you can use to calculate the gratuity amount that your organization owes you.
Frequently Asked Questions
What are the new rules for gratuity in 2024?
According to the gratuity rules 2024, companies have to make sure that base pay makes up 50% of an employee's CTC (cost to business), with employee allowances, housing rent, and overtime making up the remaining 50%. Any additional allowances or exemptions paid by the firm beyond 50% of the CTC will be considered compensation.
Is 4 years 7 months eligible for gratuity?
Typically, gratuity eligibility requires five years of continuous service. However, under certain interpretations of the law and specific company policies, employees with 4 years and 7 months of service may be eligible if their employer rounds up the period to five years. This is not universally applicable and depends on individual employer policies.
How to calculate gratuity in the private sector?
Gratuity in the private sector is calculated using the formula: Gratuity = (Last drawn salary × 15 × Number of years of service) / 26. Here, the last drawn salary includes basic pay and dearness allowance. The total is divided by 26 to account for the average number of working days in a month, providing the final gratuity amount.
Is gratuity compulsory for a PVT Ltd company?
Yes, gratuity is compulsory for private limited companies. According to the Gratuity Act, any company employing ten or more employees is legally required to pay gratuity to eligible employees. This ensures that employees receive financial benefits for their service tenure upon leaving the company or retiring.
Can a company refuse to pay gratuity?
A company cannot refuse to pay gratuity if the employee meets the eligibility criteria outlined in the Gratuity Act. Refusal can lead to legal action and penalties. However, if the employee has been terminated for misconduct, the company may deny gratuity payment under certain conditions.
Who is eligible for private job gratuity?
Employees in the private sector are eligible for gratuity if they have completed at least five years of continuous service with their employer. This includes both permanent and contract employees. Exceptions include cases of death or disability, where the five-year requirement is waived, allowing immediate eligibility.
How much is gratuity in CTC?
Gratuity is typically included in an employee's Cost to Company (CTC) as a component of their overall compensation package. It is calculated based on the employee's basic salary and tenure with the company, contributing to their long-term financial benefits. The exact amount varies depending on salary and years of service.
Do I Get Gratuity if I Resign?
Yes, you are entitled to receive gratuity if you resign, provided you have completed at least five years of continuous service with the employer. This rule ensures that employees who have dedicated a significant period to the company receive their due financial reward upon leaving.
What is the Maximum Gratuity Limit?
The maximum gratuity limit, as per current regulations, is ₹20 lakh. This cap applies to the amount an employer is required to pay to an employee as gratuity, regardless of the employee's salary or length of service. Any amount exceeding this limit is subject to the employer's discretion.
What is Gratuity in Salary Slip?
Gratuity in a salary slip is a component of the overall compensation package, often listed under long-term benefits or statutory payments. It represents the amount accrued towards gratuity based on the employee's basic salary and tenure with the company, though it is not paid out monthly.
