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Thread Started by #Shish Ram Shivrayan

Dear Fraternity,
I have few queries on Gratuity eligibility and Payment of Bonus;
Firstly, on Bonus recent amendment have fixed the wage ceiling to Rs 7000 or Minimum wage whichever is higher, now for the employees who draw basic salary (read including DA) less than the ceiling (Rs 7000/-) and his/her basic is below the minimum wages fixed by the state for the skill category (as bifurcation of Minimum wages case is still pending with apex court and PF dept kept its enforcement circular in abeyance) so for bonus calculation which wages to be reckoned with Basic or state Minimum Wages ? (i.e. Basic Rs 5000/- and Min wages Rs 5750/-)
Secondly, Gratuity eligibility is continuous five years of service( 240 Days working in 12 months to be counted as continuous service), if employee has worked for 7 years in an organization but in 4th year he / she did not clocked 240 days. Whether the employee will be eligible for Gratuity ?

Hope to hear your views and any legal clarification if in vogue.
Thanking You,

S R Shivrayan
30th August 2016 From India, Jaipur
Dear S R Shivrayan,
Minimum Bonus as per 8.33% will be Rs. 7000/-. Bonus percent can be derive from Form A, B of Bonus Act, then you can get the amount of Bonus to be disburse.
Gratuity Act applicable when Employee completed 5 years of job having attendance of 240 days in each year.
30th August 2016 From India, Surat
Sir, Thanks for your prompt reply but my both queries remain unanswered. for Bonus my query on wages and not on percentage of bonus and for gratuity though employee has more than 5 years of service but in between one year he did not attained 240 days of attendance and neither side he has continuous service of 5 years. So what is the eligibility ?
Thanks / Regards
30th August 2016 From India, Jaipur
Dear Shish Ram
Please note that minimum bonus as per new notification is Rs.7000/- or minimum wage of the scheduled employment of the state concerned which is higher.
As far as Gratuity is concerned, in case one has not completed 240 days in any year of his service, the relevant year will be reduced from the length of service.
P K Sharma
30th August 2016 From India, Delhi
The bonus is computed on actual wages subject to a ceiling of ₹7000 or minimum wages whichever higher. Since in your case the amount is less than the ceiling it will be paid on basic + DA
31st August 2016 From India, Mumbai
Dear Shivrayan,
In your case you have to pay Bonus on the minimum wages of Rs.5750/- even in your case the Basic wage is Rs.5,000/-. This is because of the amendment in the Bonus Act specifically indicates the bonus calculation as Rs.7000 or the minimum wages fixed by the Government in the scheduled employment whichever is higher. Therefore, I am of the view that the bonus payment to the employees is to be paid on Minimum Wages of scheduled employment irrespective of seeing the components of wages. Experts may offer their views on this aspect, since so subject matter is so relevant at this current scenario.
As for the Gratuity, he is entitled to gratuity payment.
Regards,
31st August 2016 From India, Mumbai
Dear Shridharan,
Please go through the amendment which is reproduced hereunder:-
In section 12 of the principal Act,—
(i) for the words ‘‘three thousand and five hundred rupees’’ at both the places where they occur, the words ‘‘seven thousand rupees or the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher’’ shall respectively be substituted;
Keeping in view of the above, your suggestion to pay bonus on Rs.5750/- is wrong because Rs.7000/- is higher.
As far as gratuity is concerned, if a person has not worked at least 240 days in a calendar year, that particular year is excluded from total number of years for which gratuity is payable.
P K Sharma
31st August 2016 From India, Delhi
Dear all,
Before writing about continuous service do read the definition as per section 2-A. One year service for orgs working 6day a week is 240 days& for those working 5days a week is 190 days. In 6 month period such employee should have worked for 120 or 95 days for rounding of these months to year. Please ensure what you write lest thus may misguide the ones who are looking at us for guidance.
1st September 2016 From India, Mumbai
Dear Mr P K Sharma

When actual monthly salary or minimum wage is less than Rs.7000/- there is no need to reckon monthly salary as Rs.7,000/-. Therefore, the Actual Salary (which is not less than minimum wages) should alone be taken into consideration for payment of bonus. In the subject case actual minimum wage is only Rs.5750/- and hence the bonus can be calculated only according to the earned wages / minimum wages. Only when the monthly salary exceeds Rs.7,000/- it should be limited to Rs.7,000/- or to the extent of minimum wages whichever is higher and such amount should be reckoned for payment of Bonus.

As far as the payment of gratuity is concerned, I agree that in the case of a workman has not worked the requirement of 240 days in a year that can be treated as break in service while calculating the Gratuity working. However, this clause would be applicable only in the event of an order passed by the Management in accordance with the standing orders, rules or regulations governing the employee of the establishment. In the absence of such order, the employee would be entitled to full Gratuity for the service rendered by him continuously(refer Section 2A of the Payment of Gratuity Act). Legal experts may certify this, if it is correct or otherwise offer further views.

Regards,
1st September 2016 From India, Mumbai
Dear Sirs,
The ceiling of ' Rs 7000 or Minimum wages ... whichever is higher' is applied on upper wage ceiling and not for the wages less than Rs 7K as you may recall earlier also those who were drawing less than Rs 3500 were being paid bonus as per their Basic only.
As per my understanding the Minimum wages clause was added because some of the states (like Delhi) were having Min wages more than Rs 7000.
Would like other experts to enlighten us on subject as already we have got diverse views on the issue.
S R Shvrayan
1st September 2016 From India, Jaipur
Benefits of Set up of Gratuity Trust by the Companies
Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal. It means, Gratuity amount is determined only on the monthly terminal wages of the employee on his exit from the Company after completion of 5 years of Service. The cost is to be borne by the Company and not by an employee. hence, unlike other fringe benefits (i.e. Medical Insurance, Term Insurance & Accidental Insurance) it can not be part of CTC.
To understand this, let us take an Example,
Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.
Now Gratuity Payments for next 5 years will be :-
On Completion of 1 Yr - (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs - (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs - (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs - (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs - (15/26)*41,873*5 = 1,20,788/-
Now for making the payment of gratuity, Company has 2 options :
(i) Pay as you go option - Where company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.
Expected Tax Benefit calculation in case of "Pay as you Go Option" :-
For Provision of 1st Yr - NIL
For Provision of 2nd Yr - NIL
For Provision of 3rd Yr - NIL
For Provision of 4th Yr - NIL
For Payment on 5th Yr - 1,20,788/-
In this case company, Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-.
(ii) Funding Option - In this option, Company decides to Setup an Approved Gratuity Trust . The Investment of Company is either "Self Managed " or “ Manager by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.
Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
In this case, Mr. A will get gratuity of Rs. 1,20,788/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,74,536/- for annual contribution made by him in previous 5 years.
To get more clarity on the above example, let us take some more questions about the possibilities/event that may happen on or after completion of 5 years and their impact on the Company in case of "Funding Option" :-
Question 1. If employee died during 1st to 4th year before completion of 5th year, then what would be the benefit for Company and employee's Nominee ?
Answer 1. If employees died after 1 yr, 2nd, 3rd and 4th year but before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
The company will get the Tax for the contribution made by him before the date of death of the employee as stated above and employee's nominee will get following Gratuity Payments from the Trust along with a future service gratuity subject to certain limits as defined by the Insurance Company whilst taking Group Gratuity Scheme from the Insurance Company.
Question 2. If the employee resigns during 1st to 4th year and before completion of 5th year, then what would be the benefit for Company and employee?
Answer 2. If employees resign during 1st to 4th year and before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
and the employee will not get following Gratuity Payment from the Trust. The amount contributed by the company and interest accrued will be used by the trust for future payments of Gratuity to other employees of the company.
Question 3. If the employee resigns/retires after completion of 5th year, then what would be the benefit for Company and employee?
Answer 3. If employees resigns/retires during after completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
Total Contribution in 5 years...........................= Rs.1,74,536/-
and the employee will get Rs. 1,20,788/- as Gratuity Payment from the Trust. Since the company has contributed an amount in the trust is more then what is payable after 5th year so the surplus amount and interest accrued on the contributions of will be used by the trust for payment to the other employees.
From above examples of "Pay as you go Option" and "Funding Option," it is clear that Gratuity cannot be a part of CTC but it is a legal obligation which is borne by the Company on exit of the employee.
The Company may have an option to set up a Gratuity Trust and make an annual contribution in the "Irrevocable Trust" so that he can avail the tax benefits Section 36(1)(v) of the IT Act 1961 and will have a Corpus in "Irrevocable Trust" which will be exclusively used by the Trustees to meet with Company obligation towards Gratuity Payments.
To know more about Employee Benefits Plans Restructuring as per the rules and regulations of the Act/Acts (i.e. Gratuity, Leave Encashment & Long Service Awards), Gratuity Trust Fund Set-up & Retention Schemes like Employer-Employee Scheme for your highly paid Employees.
You may avail our Consultancy Services.
With Regards
Tikaram Chaudhary
Group Gratuity Trust Fund & Group Insurance (Retention Schemes) Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Retention Schemes)
Email Id:
Mobile Number: 9211637063
For more details about us visit our blog at www.gratuityconsultant.blogspot.com
23rd February 2019 From India, Delhi
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