Difference between Statutory provisions applicable to Companies under Existing Payment of Gratuity Act 1972 (A) & The Social Security Code 2010

This article is an attempt to elaborate the difference between Statutory provisions applicable to Companies under Existing Payment of Gratuity Act 1972 (Amended) & The Social Security Code 2020 effective from 01.04.2021.

Background

Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC’s, Schools and Other business entities) having more than 10 employees. Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him. gratuity is a statutory obligation on the shoulders of the employer to make the payment of Gratuity to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

Present Provisions under the Payment of Gratuity Act 1972 (Amended 2018)

Provisions of Gratuity - (Refer Section 4 (1) of The Payment of Gratuity Act 1972 (a)

(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -

(a) on his superannuation, or

(b) on his retirement or resignation, or

(c) on his death or disablement due to accident or disease:

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.]

Explanation.: For the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he, was capable of performing before the accident or disease resulting in such disablement.

Determination of Gratuity Amount (Refer Section 4 (2) of The Payment of Gratuity Act 1972 (a)

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages or such number of days as may be notified by the Central Government, based on the rate of wages last drawn by the employee concerned:

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season:

(Wages of the employee at the time of exit) x (7/26) x (Number of Years of Service at the time of exit)

Definition of Wages - (Refer Clause S of Definitions of The Payment of Gratuity Act 1972 (a)

"wages" means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which arc paid or arc payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.

Ceiling Limit on Gratuity Benefits- (Refer Section 4 (3) of The Payment of Gratuity Act 1972 (a)

The amount of gratuity payable to an employee shall not Twenty lakhs rupees.  

Provision for Additional Benefits to Employee by Employer- (Refer Section 4 (5) of The Payment of Gratuity Act 1972 (a)

Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

Legal Provisions on Employer for payment of Gratuity- (Refer Section 7 (1), 7(2) & 7(3) of The Payment of Gratuity Act 1972 (a)

7. (1) A person who is eligible for payment of gratuity under this Act or any person authorized, in writing, to act on his behalf shall send a written application to the employer, within such time and in such form, as may be prescribed, for payment of such gratuity.

7. (2) As soon as gratuity becomes payable, the employer shall, whether an application referred to in sub-section (1) has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the controlling authority specifying the amount gratuity so determined.

7. (3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.

7. (3A) If the amount of gratuity payable under sub-section (3) is not paid by the employer within the period specified in sub-section (3), the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits, as that Government may, by notification specify:

Provided that no such interest shall be payable if the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the controlling authority for the delayed payment on this ground.

New Provisions effective under the Code of Social Security 2020

Provisions of Gratuity - (Refer Section 53 (1) of The Social Security Code 2020

Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,—

(a) on his superannuation; or

(b) on his retirement or resignation; or

(c) on his death or disablement due to accident or disease; or

(d) on termination of his contract period under fixed term employment; or

(e) on happening of any such event as may be notified by the Central Government

Provided that in case of working journalist as defined in clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955, the expression "five years" occurring in this sub-section shall be deemed to be three years:

Provided further that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement or expiration of fixed term employment or happening of any such event as may be notified by the Central Government:

Provided also that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the competent authority as may be notified by the appropriate Government who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed by the appropriate Government, until such minor attains majority

Determination of Gratuity Amount - ( Refer Section 53 (2) of The Social Security Code 2020

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages or such number of days as may be notified by the Central Government, based on the rate of wages last drawn by the employee concerned. The formula for calculation of Gratuity for such employees will be: -

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season. The formula for calculation of Gratuity for such employees will be: -

(Wages of the employee at the time of exit) x (7/26) x (Number of Years of Service at the time of exit)

Provided also that in the case of an employee employed on fixed term employment or a deceased employee, the employer shall pay gratuity on pro rata basis. The formula for calculation of Gratuity for such employees will be: -

(Wages of the employee at the time of exit) x (15/26) x (Pro Rated Fraction & Completed Year of Service at the time of expiration of term of employment)

New Definition of Wages - (Refer Section 2 (88) of The Social Security Code 2020

"wages" means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes, —

(a) basic pay;

(b) dearness allowance; and

(c) retaining allowance, if any,

but does not include—

(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;

(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;

(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;

(d) any conveyance allowance or the value of any travelling concession;

(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

(f) house rent allowance;

(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;

(h) any overtime allowance;

(i) any commission payable to the employee;

(j) any gratuity payable on the termination of employment;

(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment, under any law for the time being in force:  

Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause: Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wage.

Explanation. —Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee;

Ceiling Limit on Gratuity Benefits- (Refer Section 53 (3) of of The Social Security Code 2020

The amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government. (At present 20 Lacs)

Legal Provisions on Employer for payment of Gratuity- (Refer Section 56 (1), 56(2), 56(3) & 56(4) of The Social Security Code 2020

56. (1) A person who is eligible for payment of gratuity under this Chapter or any person authorised, in writing, to act on his behalf shall send a written application to the employer, within such time and in such form, as may be prescribed by the appropriate Government, for payment of such gratuity.

56. (2) As soon as gratuity becomes payable, the employer shall, whether an application referred to in sub-section (1) has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the competent authority specifying the amount of gratuity so determined.

56. (3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.

56. (4) If the amount of gratuity payable under sub-section (3) is not paid by the employer within the period specified in sub-section (3), the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long term deposits:

Provided that no such interest shall be payable if the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the competent authority for the delayed payment on this ground.

Compulsory Gratuity Insurance (Refer Section 57 (1), 56(2), 56(3) & 56(4) of The Social Security Code 2020.

57. (1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed by the Central Government, for his liability for payment towards the gratuity under this Chapter, from any insurance company regulated by the Authority as defined under clause (b) of sub-section (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999:

 Provided that different dates may be appointed for different establishments or class of establishments or for different areas

In my next article, we will Quantitively Analyze and understand the impact of New Provisions of Social Security Code 2010 on the Gratuity Liability of Companies.

To avail our Consultancy for Formation of Gratuity Trust & Support Services for Preparation of Inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19 & IAS 19 (Revised 2011) - IFRS, you may send your requirement at [email protected]

With Regards

Tika Ram Chaudhary

Gratuity, Pension, Superannuation Trust Fund Consultant

(Corporate Consultant with more than 12 Years of experience in providing Support Services to Indian and Multinational Companies for Formation of Gratuity Trust, formed to gain Tax Benefit available for Companies under Section 36 (1) (v) of Income Tax Act 1961 & Specialized Support Services for preparation of Inputs for Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2011) - IFRS & USGAAP required by Gratuity Trust of Indian Companies)

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