I Want To Know About How To Pay Gratuity - CiteHR
Industrial Relations And Labour Laws
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Is it compulsory to have trust to make the gratuity payment to the employee on separation or directly can we pay from from company? Thanks Nisha
You can do it both ways. See this

For Every completed year of service or part there of in excess of 6 months the employer shall pay gratuity to an employee at the rate of 15 days wages based on rate of wages last drawn by the employee concerned.

According to explanation under section 4(2), if the wages is paid monthly then the per day wage for the pupose of calculation of gratuity will be calculated as follows :-

Salary/Wages For Gratuity = Rate of Monthly Wage Last Drawn * 15 /26

In case of employee paid on piece rate basis, daily wages is computed as average of total wages received in a period of 3 months immediately preceding the date of termination. For this purpose, the wages paid for any overtime work shall not be taken into account.

In the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season.

The amount of gratuity payable to an employee shall not exceed ten lakh rupees.

For complete see Payment of Gratuity Act, Rules, Forms, Returns & All Other Information

Section 4A of the Payment of Gratuity Act provides for compulsory insurance of the gratuity fund. As such every employer is expected to have a board of trustees of approved gratuity fund. This fund is constituted by contribution by the employer every year to LIC. Whenever an eligible employee leaves, the payment is made from the trust. Invariably, LIC will issue cheque for the amount of gratuity to the Trust.

However, this section is enforced state wise and only a a few states, like Kerala, have notified the date of bringing in to effect of this provision. Therefore, if your state has not notified the date of implementation of this section, you are not under any obligation to have a trust but yearly provision towards gratuity liability based on actuarial valuation is sufficient. This is as per mandate of new Accounting Standards.

Employers coming under the above category can make direct payment of gratuity to employees.

Under the first option there are some advantages, like, the employer need not worry about liquidity whenever there are a few employee exits, and there can be an option for death cum gratuity scheme wherein by paying a small amount as additional premia, the benefit payable in the event of employee's death before the age of superannuation can be made at a projected salary and service etc. Obviously, the drawback is that we have to pay premium every year. At he same time the premium paid in respect of employees who have left without qualifying for gratuity or without serving the company for at least 5 years, will be there in the fund and, obviously, the next year's premium will be calculated based on this amount available in the fund. In the second case, only a provision is required to be made in the books of accounts.


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