Gratuity

What is Gratuity?

Gratuity is an amount of money that is paid by an employer to their employee for services rendered over some time. It is usually paid when an employee decides to retire, but it can be paid before that only if Gratuity meets the certain criteria as desired.

Employees are eligible of receiving the Gratuity from the company only when they have served the company for a minimum of 5 years. But if an employee gets disabled due to some accident or disease they can receive this amount earlier. On the passing of an employee, the total Gratuity will be given to the employee’s immediate family or next of kin.

Eligibility Criteria for Gratuity

One needs to fulfill the following Gratuity needs to receive the Gratuity payout:

l The employee must be qualified for retirement or superannuation benefits.

l The employee must be retired from service.

l The employee should have resigned from the company after being employed for a period of five years.

l The employer has suffered disability from an accident or illness, or, in case of death.

How is Gratuity calculated?

There are no set standards for calculating the amount of Gratuity payable. The Gratuity is calculated based on the period of employment and the last drawn salary of the employee. Employers can calculate Gratuity payable by using the above formula. Payment of Gratuity Act,1972 has been put in place by the Government of India to ensure that employees of a company have some form of pension at the time of retirement. If any company is hiring more than 10 employees at any point in time, then they are required by the Government of India to pay its employees Gratuity. Employees are of two types, one in which employees are covered by the act and the other in which they are not covered by the Payment of Gratuity Act,1972. Therefore, they are two ways of calculating Gratuity:

1. The first formula for calculating Gratuity is based on the 15 days of the last drawn salary and the number of years in the employee’s tenure. The formula is as below:-

(15 X Last drawn salary X years of tenure)/26

*26 here denotes the number of working days in a month. An average of 26 days considering 4 Sundays.

2. For companies not covered in the purview of the Payment of Gratuity Act, 1972 the formula to calculate Gratuity is quite similar:-

(15 X Last drawn salary X years of tenure)/30

*30 denotes the average number of days in a month, not taking into consideration any non-working days.

Gratuity Tax Treatment

Gratuity received by Government employees is exempted from tax. Whereas the Non-Government employees are further divided into two categories for taxation, employees that fall under the Payment of Gratuity Act, 1972, and the employees that don’t fall under the purview of this act. The tax-exempted amount of Gratuity is the same for both these types of employees, but the formula for calculating the Gratuity is different.

Forfeiture of Gratuity in accordance with the Gratuity Act

According to the Payment of Gratuity Act, 1972, Gratuity can be forfeited by the employer in the following cases:

1. Employee is terminated by wilful omission or negligence causing damage or loss of employer’s property.

2. Moral vileness is an offense and it can get the employee terminated.

The company will decide whether the Gratuity will be partially or completely terminated based on the offense committed by the employee.

Timeline for the Gratuity payment

Initiation — This I a phase wherein the employees applies for Gratuity by sending a relevant form or application to their respective employer.

Reception and Calculation — Whenever the employer receives a Gratuity disbursal request, they should acknowledge and provide a notice to the employee stating the specified amount in it.

Disbursal — Employers are supposed to complete the disbursal of the complete amount within 30 days of releasing the notice.

Nomination under the Payment of Gratuity Act, 1972

Employees are asked to mention a nomination for the Gratuity as soon as they complete one year in the company. The nomination can be anyone they wish to. It can be one or more than one person and can be changed anytime by the employee. If the employee fails in providing a nominee then the Gratuity will be received by the closest legal heir of the deceased employee. If the heir turns out to be a minor, the bank holds the amount until the child reaches maturity. Under the act, the family or heir is defined as the Spouse, Children, Adopted child, or dependent parents.

With the help of the Gratuity formula and calculation, employers can calculate the amount of Gratuity that they have to pay to their eligible employees.