Delayed gratuity payments incur a 12% annual interest rate. Employers must pay within 30 days to avoid penalties and legal action.
If an employer delays the payment of gratuity beyond the legally mandated period of 30 days, they are required to pay an interest of 12% per annum on the pending amount. This interest is calculated from the due date until the actual date of payment, as specified under the Payment of Gratuity Act, 1972.
Understanding Gratuity Payment
Gratuity is a lump sum paid by an employer to an employee as a gesture of gratitude for their service, typically after completing five or more years with the organization. It offers vital financial support, especially post-retirement.
In India, gratuity is governed by the Payment of Gratuity Act, 1972. The amount is based on the employee’s last drawn salary and the total years of service.
Gratuity Payment Timelines
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For resignation or retirement: Payment must be made within 30 days of the exit date.
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In case of death or termination: Payment must be made within 30 days from the date of exit or death.
Failure to do so makes the employer liable to pay interest on the outstanding amount.
Gratuity Interest Rate for Delayed Payments
The government mandates an interest rate of 12% per annum on delayed gratuity payments. This serves as compensation for the delay and a penalty for the employer.
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Interest is calculated monthly.
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It begins on the 31st day after the payment due date and continues until the actual payment date.
Example: If gratuity is delayed by 3 months, the employer must pay the original amount plus 12% annual interest calculated for those 3 months.
Consequences of Delayed Gratuity
For Employees:
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Financial hardship
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Disruption in retirement plans
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Legal stress
For Employers:
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Interest payment on the due amount
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Penalty up to twice the gratuity payable
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Imprisonment up to six months for willful non-payment
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Damage to reputation and employee trust
Employees can file a complaint with the controlling authority under the Gratuity Act, which can enforce payment and impose penalties.
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FAQs
What is the interest on late payment of gratuity?
Interest on late gratuity payment varies but typically accrues at a rate specified by the government, often linked to the prevailing bank interest rates or as outlined under the Payment of Gratuity Act. It's calculated from the due date until the actual payment.
What if gratuity is not paid on time?
If gratuity isn't paid on time, the employer might face penalties or legal consequences as mandated by the Payment of Gratuity Act. Employees can file complaints with labor authorities to ensure their entitlements.
What is the penalty for failure of payment of gratuity?
Failure to pay gratuity as per the Act can lead to penalties imposed by labor authorities. Penalties vary but typically involve fines or additional compensation to the employee, including interest on the overdue payment.
Is interest payable for delayed payment of pension?
Interest on delayed pension payments might be applicable, depending on the terms specified in pension regulations or government rules. It often incurs interest calculated from the due date until the actual disbursement.
How do you calculate gratuity interest?
Gratuity interest is generally calculated using a formula that involves the principal gratuity amount, the gratuity interest rate specified by the government or the Act, and the duration of the delay from the due date until the actual payment.
What is the Supreme Court decision on interest on gratuity?
The Supreme Court has reinforced that interest on delayed gratuity payments is a rightful entitlement of employees. The court rulings often uphold the employer's obligation to pay interest as per the rules and conditions outlined in the relevant labor acts.
What is the rate of gratuity?
The gratuity interest rate in India was 15% of the employee's last drawn salary for each completed year of service. This rate may vary in different countries or regions, so it's advisable to check the specific labor laws or regulations applicable to your location
Is gratuity interest taxable?
Gratuity interest received is taxable in India. According to the Income Tax Act, any interest received on gratuity is considered as income and is subject to taxation under the head ‘Income from Other Sources’ at the applicable slab rates.
Is gratuity taxable if I resign?
Yes, gratuity is taxable if you resign from your job before completing 5 years of continuous service. In such cases, the gratuity amount received is taxable as per income tax rules. However, if the employee resigns due to death or disability, the 5-year rule does not apply, and gratuity remains non-taxable.
Will there be interest for gratuity?
Gratuity payments do not typically accrue interest unless there is a delay beyond the statutory period for payment (within 30 days of becoming payable). If the payment is delayed beyond this period, interest may be applicable as per the provisions of the Payment of Gratuity Act, 1972.
Is gratuity part of CTC?
Gratuity is often included as a part of Cost to Company (CTC) in employment contracts. However, it is not a mandatory component of CTC. Employers may choose to include it as part of the total compensation package, alongside other benefits and allowances, depending on company policies and industry norms.
