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Where is the Payment of Gratuity Act 1972 applicable?

This blog will provide information about gratuity payment rules and explain the situations in which gratuity is applicable, according to the Payment of Gratuity Act 1972.

It was in 1972 that the rules of gratuity payment rules were introduced via the Payment of Gratuity Act, 1972. The rules associated with gratuity become applicable to such persons who are part of an organization, be it a Government or private organization.

What is gratuity? It’s a one-time payment made for the services of an employee. It can be availed of by the employee post retirement or after five years of continuous service in an organization. 

To begin with, gratuity payment had an upper limit of ₹ 10 lakhs. If the gratuity amount for an employee was more than that, then the employee needed to pay a tax on the additional amount. When new rules of gratuity 2020 were introduced, the gratuity threshold went up to ₹ 20 lakhs.

Every government department at the State and Centre level in India is covered under gratuity.  Even the defense forces and local governing bodies fall in its preview. Private sector organizations will be subject to this act if they fulfil specific conditions.

Meaning of Gratuity Payment Rules

There are various rules associated with gratuity.  The Payments Gratuity Act, 1972 mandates rules for gratuity.   It was passed on 21 August 1972 by the Parliament, and on 16 September 1972, it came into force.

We can look at gratuity as being a monetary benefit that an employer provides to an employee for the services that the employee has rendered to the organization. This amount is generally paid out by an organization at the time of retirement of the employee, considering that the employee has completed continuous service of a minimum of five years with that organization. 

What Are the Gratuity Payment Rules?

Let us look at the various rules associated with gratuity payment.

Gratuity is seen as a monetary payment that an employer makes to an employee showing gratitude towards an employee for the services rendered by the employee to the organization. 

Here are the gratuity payment rules associated with the applicability of gratuity.

The Organization Must Have Ten or More Employees for Gratuity to Be Applicable

Only if an organization has had a workforce of a minimum of 10 employees on any given day in the previous 12 months does it become liable for paying out gratuity. In case the number for the organization in future falls below 10 employees, the organization is still liable for gratuity payout, according to the rules of the Act. 

Employees Must Have Five Years of Continuous Service with The Organization

An employee must have continuous five years of service with an organization to become eligible for receiving gratuity from the organization.  This condition is no longer applicable in the case of:

  • The demise of the employee
  • The disablement of the employee

According to the rule, the five year term calculation considers a single year as 240 working for the employees of an organization that does not have the employee working underground. For employees who work in mines and similar fields, the number of days that make up their work year is 190 days. 

In the continuous service of five years, consideration is also made for such interruptions that may be due to layoffs, leave, accident, lockout, absence from work without leave, and service termination which is not on part of the employee.

Time Of Gratuity Payment

According to gratuity rules, gratuity payments can be made to an employee at any of the following times. At the time of:

  • Demise
  • Disablement from disease or accident
  • Resignation
  • Retirement
  • Retrenchment lay off
  • Termination
  • VRS

Basic Gratuity Payment Calculation

The calculation of gratuity of an employee is done on the basis of the last salary that the employee had drawn with the organization, and the years of continuous service of the employee with the organization. 

Termination of Gratuity

An employee’s gratuity can be terminated if the employee is: 

  • Involved in some offence of moral turpitude
  • Involved in disorderly conduct or riotous conduct, or any other act of violent

Gratuity Cannot Be Forfeited by an Employer

An employer cannot refuse to make a gratuity payment even if the employer becomes bankrupt.  The employer is accountable for the gratuity payment to the workers. Even a court order or decree cannot restrict an employer against it.

Tax-Exempt Gratuity

According to gratuity rules, 2021, gratuity payable by companies to ₹ 20 lakhs under provision of Payment of Gratuity Act, 1972 is exempt of taxes. Tax-exempt amount used to be ₹ 10 lakhs previously.

Employment Based Income Tax on Gratuity

The type of employment is also a criteria of whether or not Income Tax will be applicable on the Gratuity amount. 

Limit for Tax Exemption on Cumulative Gratuity Obtained

There is a ₹ 20 Lakhs limit set for exemption of tax on cumulative gratuity obtained.

Gratuity Amount Given to Employee’s Widow or Legal Heir

In case of the demise of an employee, gratuity payable to the employee’s widow or legal heir is tax exempt.  All ex-gratia payment to an employee or legal heir due to injury is tax exempt.

When Does an Employee Receive Payment of Gratuity?

When an employee wants gratuity from the employer, the employee must have a record of continuous five years of service with that company.  But, this condition is not applicable if the employee had become disabled, or in the condition of the employee’s demise. 

The type of employment will decide how the gratuity will be calculated.  For example, for people working in mines and similar fields, one year is 190 working days, and in case of other types of employment, a single year is 240 working days. 

Continuous service comes with interruptions that might be due to lockout, layoff, strike, absence from duty without leaves, service termination, and accident.

As aforesaid, gratuity payments can be made to an employee at any of the following times. At the time of:

  • Demise
  • Disablement from disease or accident
  • Resignation
  • Retirement
  • Retrenchment lay off
  • Termination
  • VRS

Gratuity and Death, Dearness Allowance, and Qualifying Service

On 1 April 2021, a new labour law got implemented under the Four Labour Code. This new definition eliminates the following from an employee’s salary:

  • Pension
  • Bonus
  • PF contributions
  • HRA
  • Overtime
  • Gratuity
  • Conveyance allowance

The implication is that the basic salary’s share should be 50% or higher. 

A huge remodeling of the salary structure will come about post the implementation of the new labour law.  It could lead to a fall in the employee’s in-hand salary.  Furthermore, there will be a rise in the deduction for social security schemes’ amount, like for Provident Fund (PF).

Also, according to the new rule, employee allowances cannot be more than 50% of the employee’s total salary. So, the employers will need to raise the employees’ basic salary by fifty percent. The purpose of this new rule is to provide the employees with better retirement benefits than were being provided till now. 

Furthermore, DoPPW (Department of Pension and Pensioners’ Welfare) has released the Pension Rules 2021, according to which a Government servant with a minimum of 5 years of service who has qualified for pension / service Gratuity according to Rule 44, shall get retirement Gratuity of one-fourth of emoluments for every six-monthly period of the qualifying term.

Death Gratuity

Here are the terms associated with gratuity payout during death. 

  • When qualifying term of service is less than one year, the gratuity payout will be double the emoluments.
  • When qualifying term of service is an year or more, yet under five years, the gratuity payout will be six times the emoluments.
  • When qualifying term of service is great than or equal to 5 years but less than 11 years, the gratuity payout will be 12 times the emoluments.
  • When qualifying term of service greater than or equal to 11 years, but under 12 years, the gratuity payout will be 20 times the emoluments.
  • When qualifying term of service is more than or equal to twenty years, gratuity payout will be half of the emolument for every six-month period of the qualifying term completed. This will be subject to maximum 33 times of the emoluments.
  • When a retired government servant dies within 5 years from retirement date and without having got an amount of gratuity, the deceased’s family shall will get a residuary gratuity according to Pension Rules of 2021

Death gratuity is also applicable when the government servant commits suicide.

Dearness Allowance

According to Pension Rules 2021, Dearness Allowance (DA) that is admissible on the date of the death or retirement of the employee has to be looked upon as emoluments for gratuity calculation in India.

Qualifying Service

For computing the duration of qualifying service / term, a part of a year equal to 3 months or more will be taken to be full six month. Also, it will be taken to be qualifying service. 

Gratuity is the amount that an employer pays out to an employee for the years of service rendered by the employee to the employer.  This amount is subject to several gratuity payment rules under the Payment of Gratuity Act, 1972 and further provisions associated with it, such as the Pension rules, 2021. 

In 1972 the rules of gratuity were introduced through the Payment of Gratuity Act, 1972. The gratuity rules become applicable on such persons who are part of both private and government organizations. While the gratuity amount is taxable, there are certain provisions that make it tax exempt.  

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