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Payment of Gratuity Act 1972

Passed in the Parliament of India on the 21st of August 1972, the Payment of Gratuity Act 1972 came into force on 16th September 1972. It is an act that ensures gratuity- the employers mandatorily pay a lumpsum amount as gratitude for services to their employees.

Gratuity is an amount that the employer pays to their employees as a form of gratitude for the services offered by the employees. Employers can pay gratuity from their account or through a group gratuity insurance plan.

The insurance plans for gratuity cover employers in case a sudden liability arises for payment of gratuity. Moreover, employers also benefit from earning interest and tax benefits on the amount they pay as gratuity.

This blog is a compilation of everything one needs to know about the Payment of Gratuity Act 1972, from its meaning to the grounds for revoking the clause.

What is the Payment of Gratuity Act 1972?

The Payment of Gratuity Act makes it compulsory for employers to pay gratitude or gratuity toward their employees. Employees working in railways, factories, ports, shops, mines, and oilfields can benefit from this act as these sectors are covered under the same.

Moreover, the Payment of Gratuity rules include insurance policies that cover employers in case sudden liability arises. A company deposits its annual contribution with an insurance provider. In return, the insurance company pays the gratuity amount to the employee as per the policy guidelines.

The liability to pay gratuity under this act entails an organisation with a workforce of ten or more individuals. Once such an organisation comes under the Payment of Gratuity Act 1972, it has to pay gratuity even when the employee strength drops below ten.

Gratuity is paid in the following situations: when the employee retires, expires, becomes disabled from a disease or accident, resigns, is laid off due to retrenchment, is terminated, or chooses VRS.

Eligibility Criteria for Payment of Gratuity Act 1972 

To be eligible for gratuity, one must be an employee, temporary, or contractual worker. Who has to work for at least five years continuously.

This also consists of service interruption due to accident, sickness, leave, strike, layoff, absence without leave, or termination of work not caused by the employee. According to the Payment of Gratuity Act 1972, for calculating these five years, one year equals 240 working days in any organisation that doesn’t involve underground work.

As for underground work like mines, one year equals 190 working days.

Clauses for nomination under the Payment of Gratuity Act 1972 

Employees are allowed to nominate another person to receive gratuity on their behalf. But only in case of the employee’s death within 30 days of completing one year of service in an organisation.

Some of the clauses for nomination of gratuity are divided as per employees with and without family.

Employees who have a family can nominate one or more members. And nominations made to non-family members will be void. While employees can nominate a third person if they don’t have a family, this nomination will become null and void once they have a family.
 

And if the nominated person passes away, the employee can nominate other individuals in such cases.

How is Gratuity calculated? 

Gratuity calculation is based on the employee's last drawn salary and their years of service. There are two formulas used for the calculation of gratuity as per two categories:

  • For employees covered under the act

    This clause is covered under the Payment of Gratuity Act 1972, wherein an organisation employs at least ten employees in a single day in the preceding 12 months.

    Gratuity= (15 x the last drawn salary including basic +DA) x the number of years of services completed divided by 26
     

    Here, any year wherein an employee works for over six months will be counted as a year of service. If the employee works for less than six months in a year, that year will be excluded from the gratuity calculation.

  • For employees not covered under this act

    This clause is for organisations not covered under the purview of the Payment of Gratuity Act 1972 but can still pay gratuity to employees.

    In such cases, the formula for gratuity is-
     

    Gratuity= (15 x the average salary of the last ten months including basic+ DA+ commission x number of years employed) x 30
     

    Employees can also calculate their gratuity by using an online gratuity calculator. As for those who are not covered under this act, they only have to know their average salary for the last ten months.

Income Tax Implications on Gratuity 

Tax implications apply to gratuity that can be calculated with an income tax calculator.
 

Tax Applicability

 

Parameter

 

The total amount received will not attract any tax.

Local bodies, central/ state government, and defence

The least amount of the following is exempt from tax:
 

  • The amount of actual gratuity received
  • ₹ 20 lakhs
  • 15 x last drawn salary amt x no. of completed years of service) divided by 26

 

For employees covered under this Act

The least amount of the following is exempt from tax:
 

  • ₹ 10 lakhs
  • The amount of gratuity received
  • (15 x average salary for the last 10 months x no. of years employed) x 30


The clause mentioning ₹ 20 lakhs is the cumulative gratuity. That is received from all the employers in 1 year or over different years.

Conditions for termination of Gratuity 

According to the Payment of Gratuity Act 1972, employees can be denied gratuity if they are terminated from service due to committing an offensive of moral turpitude or disorderly conduct, riotous conduct, or other violent acts.

However, no organisation can refuse payment of gratuity because of bankruptcy. And no decree of the court will be able to withhold this action.

What is the new Payment of Gratuity Rules 2023? 

The new gratuity rules were enacted under the new labour law on 1st July 2022 for all organisations and businesses. Under the new labour law, the Provident Fund, the in-hand salary, and working hours were reduced.

According to the 2023 rules, the base salary should be fifty per cent of the employee’s CTC (cost to the company). And the other fifty per cent includes housing, overtime, allowances, etc.

Extra allowances and exemptions over fifty per cent of the cost to the company paid by the employer will fall under remuneration.

Conclusion

The Payment of Gratuity Act 1972 is very beneficial for employees. It is a reward for their time and efforts to the company. Additionally, as per the 2023 rules for gratuity, the maximum basic pay is limited to 50% of the cost to the company (CTC). This enhances the bonus to be paid to the employees. The Payment of Gratuity rules include overtime, basic pay, and allowances.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

What is the highest amount of gratuity payment paid to an employee?

The amount of gratuity paid to an employee cannot be more than Rs. twenty lakh.

Are sick leaves counted in payment of the Gratuity Act 1972?

The five-year period to qualify for gratuity excludes sick leaves, leave without pay and accident leave.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed1 issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.