Payment & Gratuity

Payment of Gratuity Act 1972 is a type of legislation in India that falls under labour laws. Companies must pay a one-time gratuity to retired employees or those who resign after at least five years of service. The law applies to all companies in India with at least ten workers.

The Act provides a lump sum payment to the employee or their nominee in case of death or disability. The amount payable is calculated based on 15 days' salary for each completed year of service.

Payment of Gratuity Act provides for the appointment of controlling authorities to settle disputes between employers and employees regarding gratuity payments. Employers must obtain insurance coverage for their gratuity liabilities, and failure to comply with the Act can result in penalties and legal action.

Gratuity Act 1972 Eligibility

To qualify for gratuity as per the Act, an employee must have completed at least five years of continuous service in the same establishment, including seasonal or interrupted service.

But this excludes periods of absence due to sickness, accident, or leave without pay. The Act also provides for the payment of gratuity in case of death or disablement due to accident or disease.

When is Gratuity Paid?

Gratuity is paid at these times.

●?? ?Retirement: Gratuity is typically paid at the time of retirement of an employee as a token of appreciation for their long-term service.

●?? ?Resignation: Employees who resign after completing a minimum of five years of service are eligible for gratuity.

●?? ?Death or disability: If an employee is terminated due to a disability or death, the employer must pay the gratuity amount to their nominee or legal heir.

How is Gratuity Calculated?

Gratuity is calculated on three main factors - the employee’s last drawn salary, the duration of the service with the organisation, and the rate of gratuity specified by the employer.

The formula for calculating gratuity is as follows.

Gratuity = (Last drawn salary x Number of years of service x 15)/26 ?

Here, 15 represents the number of days of salary (also called the gratuity rate) for every completed year of service, and 26 represents the number of working days in a month. The formula assumes that an employee works 26 days a month, and the gratuity calculation is based on the number of completed years of service.

For example, if an employee has worked with an organisation for 10 years and their last drawn salary was Rs. 90,000 per month, the gratuity calculation would be as follows:

Gratuity = (90,000 x 10 x 15) / 26? ? ? ? ? ? ? ? ?= 5,19,230/- In this example, the employee is entitled to receive a gratuity payment of Rs. 5,19,230/- from their employer.

It is important to note that the maximum gratuity payable under the Payment of Gratuity Act 1972 is Rs. 20 lakhs.?

The gratuity rate can vary from one organisation to another, and employers are required to specify this rate in their employment contracts.

For instance, if an employer has specified a gratuity rate of 20% of an employee's last drawn salary, the calculation of gratuity for an employee with 6 years of service and a last drawn salary of Rs. 75,000 per month would be as follows:

Gratuity = (75,000 x 6 x 20)/26 ? ? ? ? ? ? ? ? = 3,46,153/-

In this example, the employee is entitled to receive a gratuity payment of Rs. 3,46,153 from their employer, as per the specified gratuity rate of 20%.

What are the Conditions for Termination of Gratuity?

Here are some conditions for termination of gratuity.

●?? ?Termination due to misconduct: If an employee is terminated from their job due to any misconduct, such as theft, fraud, or harassment, they may not be eligible for gratuity.

●?? ?Resignation before completing 5 years of service: To qualify for gratuity, an employee must have worked continuously for at least f five years with their current employer. If an employee resigns before completing five years of service, they may not be eligible for gratuity.

●?? ?Termination due to disability or death: If an employee is terminated due to a disability or death, their nominee or legal heir will be entitled to the gratuity amount.

●?? ?Contractual employee: Contractual employees are generally not considered permanent employees and may not be entitled to receive gratuity. Suppose a contractual employee completes a minimum of five years of continuous service. In that case, the contractual agreement between the employee and employer must be reviewed to determine whether the contractor or the company is responsible for paying the gratuity.

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