The Payment of Gratuity Act, 1972 is a law that governs the payment of gratuity to employees in India. This Act applies to all employees who have completed at least five years of continuous service with an employer. In this blog, we will discuss the applicability of the Payment of Gratuity Act, 1972, and its key provisions.
Applicability of the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 applies to the following employees:
- Employees working in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments that employ ten or more employees.
- Employees who work in any other establishment, which may be notified by the central government.
- Any person who is employed on a temporary basis, through a contractor or by a company engaged in a statutory development project.
Key Provisions of the Payment of Gratuity Act, 1972
- Eligibility: An employee is eligible to receive gratuity if he/she has completed at least five years of continuous service with the employer. In the case of death or disablement of an employee, the gratuity is payable even if the employee has not completed five years of service.
- Calculation of Gratuity: The amount of gratuity payable to an employee is calculated as 15 days’ wages for each completed year of service. The wages are calculated as the last drawn salary of the employee, including any dearness allowance and commission. The maximum amount of gratuity payable under this Act is Rs. 20 lakhs.
- Payment of Gratuity: The gratuity amount is payable to the employee within 30 days from the date it becomes due. If the gratuity amount is not paid within this period, the employer is liable to pay interest on the amount from the due date until the actual date of payment.
- Nomination: An employee can nominate a person to receive the gratuity amount in case of his/her death. The nomination has to be made in writing and submitted to the employer. The nomination can be changed by the employee at any time during his/her employment.
- Penalties: If an employer contravenes any provision of this Act, he/she can be fined up to Rs. 10,000 or imprisoned for up to six months. In case of a repeated offence, the fine may be up to Rs. 20,000, and imprisonment may be up to two years.
Here’s some more information on the Payment of Gratuity Act, 1972, focusing on additional important aspects:
- Exemptions under the Act:
Certain employees are exempted from the provisions of the Payment of Gratuity Act, 1972. These include:
a. Employees who are covered under the Central Civil Services (Pension) Rules or any other similar law in force.
b. Employees working in establishments where a gratuity scheme is already in operation, providing benefits that are similar or more favorable than those under the Act.
- Continuous service:
The Act defines “continuous service” as uninterrupted employment with an employer, excluding periods of absence due to sickness, accident, layoff, strike, or cessation of work due to circumstances beyond the employee’s control. Continuous service also includes breaks due to maternity leave, temporary disablement, and authorized leaves.
- Maternity leave and gratuity:
If an employee is on maternity leave, the period of absence is considered as part of continuous service for calculating the gratuity. This means that the maternity leave period is not deducted from the overall service duration.
- Tax implications:
Gratuity received by an employee is taxable under the Income Tax Act, 1961. However, there are exemptions available based on the employee’s eligibility and the amount received. As of the knowledge cutoff in September 2021, the maximum tax-exempt gratuity amount was Rs. 20 lakhs.
- Employer’s obligation:
The Act places a responsibility on the employer to determine the eligibility and amount of gratuity payable to an employee and to maintain appropriate records. The employer is required to display a notice containing information about the provisions of the Act, including the name and address of the controlling authority.
- Dispute resolution:
In case of any dispute regarding the payment of gratuity, an employee can approach the controlling authority appointed under the Act. The controlling authority has the power to inquire, adjudicate, and decide upon such disputes. Both the employer and employee have the right to appeal against the controlling authority’s decision to an appellate authority.
- Amendments to the Act:
It’s important to note that the Act has been amended over the years to enhance the benefits for employees. The latest amendment, as of September 2021, proposed increasing the maximum amount of gratuity from Rs. 20 lakhs to Rs. 50 lakhs. It’s advisable to stay updated with the latest amendments and notifications to ensure compliance with the Act.
Conclusion
In conclusion, the Payment of Gratuity Act, 1972, provides a valuable financial benefit to employees who have completed a minimum period of continuous service. It ensures that employees are recognized for their long-term contributions to an organization. Employers should familiarize themselves with the Act’s provisions, calculate and disburse gratuity correctly, and maintain appropriate records to ensure compliance and foster a positive work environment.
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Frequently Asked Questions (FAQs)
Q: Who is eligible to receive gratuity under the Payment of Gratuity Act, 1972?
A: Employees who have completed a minimum of five years of continuous service with an employer are eligible to receive gratuity under the Act.
Q: Is gratuity applicable to all employees in India?
A: No, gratuity is applicable to employees working in establishments with ten or more employees. However, certain establishments can be notified by the central government, bringing them under the Act’s purview.
Q: How is gratuity calculated?
A: The gratuity amount is calculated as 15 days’ wages for each completed year of service, based on the employee’s last drawn salary, including dearness allowance and commission.
Q: What is the maximum amount of gratuity payable under the Act?
A: As of the knowledge cutoff in September 2021, the maximum amount of gratuity payable under the Act is Rs. 20 lakhs. However, this amount may be revised periodically by the government.
Q: Is an employee entitled to receive gratuity if they resign before completing five years of service?
A: Generally, an employee must complete a minimum of five years of continuous service to be eligible for gratuity. However, if an employee dies or becomes disabled before completing five years, gratuity is payable even if the service duration is less than five years.
Q: Can an employee nominate someone to receive gratuity in case of their death?
A: Yes, an employee can nominate a person to receive the gratuity amount in the event of their death. The nomination must be made in writing and submitted to the employer.
Q: What is the time limit for payment of gratuity?
A: The gratuity amount is to be paid to the employee within 30 days from the date it becomes due. If the payment is delayed beyond this period, the employer may be liable to pay interest on the amount.
Q: Can an employee dispute the amount of gratuity offered by the employer?
A: Yes, if there is a dispute regarding the payment of gratuity, the employee can approach the controlling authority appointed under the Act for resolution.
Q: Can an employer deny payment of gratuity to an employee?
A: An employer cannot deny payment of gratuity if the employee is eligible and has completed the required years of service. Non-payment or wrongful withholding of gratuity may lead to penalties.
Q: Is the gratuity amount taxable?
A: Yes, gratuity received by an employee is taxable under the Income Tax Act, 1961. However, there are exemptions available based on the employee’s eligibility and the amount received. It’s advisable to consult a tax professional for specific details.
