Gratuity – Legal Provisions and Taxation

Job-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched.

Going by the book:-

• Gratuity is a reward for long and meritorious service.
• In 1972 the government passed the Payment of Gratuity Act that made it mandatory for all employers with more than 10 employees to pay gratuity.
• Gratuity shall be payable to an “employee” on the termination of his employment

after he has rendered continuous service for five years or more

Who Are the Establishment Covered Under Gratuity Act?

• Every factory, mine, oil field, plantation
• port, railways, shop & Establishments OR
• educational institution

Employing 10 or more persons on any day of the preceding 12 months

Waiving the rule

• Gratuity is payable only if you have been with the employer for five years or more.
• But this rule is waived if an employee dies or is disabled, superannuation, retirement or resignation.
• In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.

Caution:- Here employees are defined as those hired on the company’s payroll. Trainees and interns are not eligible for this compensation.

To whom is Gratuity Payable in case of death?

Gratuity is normally payable to the employee himself, however in the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs. Incase the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Formula For Gratuity Accounted:

i) Actual gratuity received

ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months

iii) Rs 10 Lakhs

Exempted From Tax

Amount should be Minimum of the Following:

i) Actual gratuity received

ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months

iii) Rs 10 Lakhs

Employees Who Get Exemption Under Section 10(10) Are:-

• Government employee and employee of local authorities.
• Employee covered under the Payment of Gratuity Act, 1972
• Other employees not covered under the Payment of Gratuity Act, 1972

How Are Gratuity Accounted for Government Company and Non-Government Company?

	Government Company	Non- Government Company
TaxExemption	The Entire Amount You Get is Exempted(under Section 10(10)(i)	Amount should be Minimum of the Following:i) Actual gratuity received ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months. iii) Rs 10 Lakhs (Under Act 1972)

 IMPORTANT :-

1. Whether TDS is to be deducted by employer on payment of Gratuity to Employees?

Only where the Gratuity amount exceeds the Exemption Amount as calculated under section10(10) of Income tax Act, TDS shall be deducted otherwise no.

2. Whether Insurance is Mandatory for Gratuity Fund?

Not Mandatory

3. If we show the Gratuity as Part of salary How we Manage and do Accounting?

It cannot be stated as part of salary.

4. If an employee whose gratuity is withheld pending completion of the proceedings is he entitled to interest on gratuity ?

The employee is entitled to interest also from the date of Gratuity till the payment of gratuity. Case law:- Supreme Court ruled in Y.K. Singla v. Punjab National Bank.

The Act does not force you to make any provision or any gratuity fund. You are to make the payment of gratuity to the eligible employee as and when is due to be paid.

Example for Calculation Of Exemption Of Gratuity:-

Mr. X receives following amount in previous year:

• Gratuity receive 3,00,000
• Year of service 30 years 7 months( excess of 6 month should be taken as full year)
• Average salary 20000

Calculation:

• 3,00,000
• (31 * 20,000 * 15/26) = 357692.31
• 10,00,000

Therefore 3,00,000 shall be exempted .

Practical Issue seen:-

Employer has resigned after working for more than 5 years. Employer signed the full and final settlement letter stating he has no dues pending from company. Full and final settlement letter does not mention anything about gratuity, Now after 3 months employee has submitted a letter claiming for gratuity. Is Employer liable to pay gratuity to employee?

Employer is liable to pay gratuity to the employee even after full and final payment, mere by signing that he/she receive all payment does not effect his /her right to claim gratuity.