The Payment of Gratuity Act, 1972 is a social security legislation that aims to provide financial assistance to employees in recognition of their long and continuous service to an organization. The Act applies to employees who work in factories, mines, oilfields, plantations, ports, railways, shops or other establishments with 10 or more employees. In this blog, we will discuss the key provisions of the Payment of Gratuity Act, 1972, its applicability, and the process of calculating and paying gratuity to employees.
Payment of Gratuity Act, 1972: Applicability
The Payment of Gratuity Act, 1972 applies to employees who have completed at least five years of continuous service in an establishment. The Act applies to all establishments, including those in the private sector, public sector, and government sectors, that employ ten or more employees. However, the Act also covers employees who work in an establishment with less than ten employees, provided that the employer has obtained a voluntary registration and is willing to pay gratuity.
Calculation of Gratuity
Gratuity is calculated based on the last drawn salary of the employee and the number of years of continuous service completed by the employee.
Gratuity = (Last drawn salary x 15 x number of years of service) / 26
In this case, the basic salary plus any dearness allowance is referred to as the last drawn salary. The number of years of service is rounded to the full year closest to it. It is rounded up to one year if the employee has worked for more than six months but less than a year.
For example, if an employee’s last drawn salary is Rs. 50,000, and he has worked for 20 years and 7 months, the gratuity amount will be calculated as follows:
Gratuity = (50,000 x 15 x 21) / 26 Gratuity = Rs. 6,75,000
Also know about: Under which section gratuity is exempt?
Payment of Gratuity
The employer is required to pay gratuity to the employee within 30 days from the date it becomes payable. If the employer fails to pay gratuity within the specified time, he will be liable to pay simple interest at the rate notified by the Central Government from time to time.
The employer is also required to obtain an insurance policy for the payment of gratuity to employees. The premium for the policy is paid by the employer, and the insurance company will be liable to pay gratuity to employees in case of the employer’s default.
Tax Implications of Gratuity
Gratuity received by an employee is exempt from income tax up to a certain limit. The limit is the least of the following:
- Actual gratuity received
- Rs. 20 lakhs
- Fifteen days’ salary for each completed year of service or part thereof in excess of six months
For example, if an employee has worked for 20 years and receives a gratuity amount of Rs. 8 lakhs, the exempted amount will be calculated as follows:
Exempted amount = (15 days’ salary x 20 years x last drawn salary) / 26 Exempted amount = (15/26 x 20 x 50,000) Exempted amount = Rs. 2,88,462
Therefore, the taxable amount of gratuity received by the employee will be Rs. 5,11,538 (8 lakhs – 2,88,462).
The Payment of Gratuity Act, 1972 is an important legislation that provides financial security to employees who have completed a certain number of years of continuous service in an establishment.