Insights on Gratuity Calculation, Payment of Gratuity Act, and Employee Benefits

As per the Indian Gratuity rules, a person needs to complete 5 years with a company. Suppose a person joins a proprietary company which does not provide for gratuity. After 4 years, the company becomes a Pvt Ltd and starts providing gratuity. Now, if the employee leaves after 3 years, the total service is 7 years, but the period under the Pvt Ltd is only 3 years. Will the employee be eligible for gratuity?

The Payment of Gratuity Act (like any other labour act) has nothing to do with how the ownership of the establishment is formed. Therefore, there is no difference in the treatment when the establishment is set up as a Proprietorship or a Company form (private limited or Public limited).

When the proprietary concern is converted into a company form, a new entity is formed. This act is equivalent to the transfer of undertaking, and the provisions of the Industrial Disputes Act would apply to such conversions. It should be presumed that the service conditions of the employees have remained the same, and as such, all employees who were on the roll before the formation of the company should be treated as having joined on the actual dates and entitled to gratuity.

Regards,
Madhu.T.K

No problem if the establishment was not covered by EPF when it was constituted as a proprietary concern. EPF contribution has nothing to do with the Payment of Gratuity, and for that, there is no deduction from the salary also.

Constitution of the company as a partnership or private limited or public limited company is only a matter of management, and it will not affect the services of the employees unless otherwise agreed upon. On conversion, the assets and liabilities of the one-man ownership company are taken over by the newly constituted entity, i.e., the private limited company. By such an act, the company is taking over the employees also, and by that taking over, any amount payable to the employees is also being taken over.

Regards,
Madhu.T.K

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Thank you, sir.

Hi, PF will be calculated on the basic salary, i.e., 12% of the basic salary. Gratuity formula -> last drawn basic salary * 15/26 * number of years of service.

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Thanks & Regards,
Devendra Kumar Dubey

Dear Madhu, I agree with you. But some companies, if EPF is not covered during proprietorship, issue a fresh letter of appointment after the conversion of the firm to a private limited. In such cases, the employees lose their right to gratuity for the period of service under the proprietorship firm. It happened to some of my colleagues.

Regards,

Hi all,

Actually, I was working in a software company for 3 months, and I was in training. During this time, I got admission to a good college and was required to join the college very soon. However, according to company rules, I should serve for at least 2 months after submitting my resignation. So, I just sent an email with my medical certificate stating that I was unwell and would not be able to come to work for the next 6 months. I then quit the job without informing anyone.

Now my question is: the same company is coming for campus placement at my college. Am I eligible to participate in the company's recruitment process? If not, is there any other way to obtain permission to work in the same company again? When I was working, I wasn't assigned to any project; it was just training.

Thank you.

Five years is generally necessary according to the Gratuity Act. However, if Gratuity payments are included in your CTC, then the management is bound to honor for less than 5 years.

S.S. Rao

Dear,

Please go through section 4 of the Payment of Gratuity Act, 1972 for both of your queries regarding eligibility, maximum payment limit, and calculation of gratuity amount.

With Regards,
R.N.Khola

In your question, it is not clear whether the number of employees at the time of being a proprietary firm was less than ten. The Payment of Gratuity Act shall apply to a factory/mine/shop/establishment, etc., where ten or more persons are/were employed. If, at the time of being a proprietary firm, the company had a total number of employees less than ten, and after conversion to a Private Ltd. company, the total strength becomes ten or more than ten, the Gratuity Act will be applicable from that point onwards and not before.

Regards,
Debrishi

Thank you, Debrishi.

You have raised a very valid point. Now, the proprietary firm had more than 10 employees, but they were employed as consultants. There was no PF or Gratuity, only TDS deduction.

What would be the impact in this case?

Certainly, the Payment of Gratuity Act may be applicable to companies that employed at least 10 persons during any day of the year. However, this does not necessarily mean that the calculation of an employee's service should start from that date. Therefore, if an employee has been in continuous service in an employment that has not been interrupted due to a change in management, it should be considered when calculating his gratuity.

Regards,
Madhu.T.K

Five years of active service is necessary for gratuity. The employee should work 240 days continuously in a year.

I want information on the deduction of Income tax from the gratuity amount. Can anybody provide information on this?

Dear Manjula,

No income tax is to be deducted if the payment of gratuity is made as per the requirement of the Payment of Gratuity Act, 1972.

With Regards,
R.N.Khola

Manjula VT had inquired about the requirement for gratuity, stating that five years of active service is necessary, and the employee should work continuously for 240 days in a year. She also asked for information on the deduction of income tax from the gratuity amount.

Thank you.

Dear Mr. R.N. Khola,

Sir, as this thread is regarding the Gratuity Act, I have some queries regarding that:

1. Is the gratuity amount payable to an employee taxable or nontaxable?
2. What are the cases when an employer can get an exemption from this act (Payment of Gratuity Act)? Please provide some examples.

Regards,
Bandini

Dear Bandini,

According to the clarification made by the members, income tax is not to be deducted on the gratuity amount received up to Rs. 3.5 lakhs. Please go through section 5 of this Act to have exemption from this Act. The Government of Haryana has given an exemption from the operation of the Payment of Gratuity Act, 1972 to the Haryana State Electricity Board in the year 2006/07.

With Regards,
R.N. Khola

Bandini,

Regarding the gratuity act, I have some queries:
1. Is the gratuity amount payable to an employee taxable or non-taxable?
2. In what cases can an employer get an exemption from this act (Payment of Gratuity Act)? Please provide some examples.

Regards, Bandini

Dear All,

I need urgent assistance. As per my knowledge, an employee is entitled to gratuity upon completion of 5 years of service. I recently resigned (April 15, 2010) from my company where I had been employed since July 2003. When I joined, the company was a proprietary firm that received VC funding in December 2005, and EPF deductions began in 2006. Upon contacting the company for my gratuity payment, they informed me that gratuity would be calculated starting from when EPF deductions began, which would make me ineligible to claim gratuity. Currently, the company has approximately 50 employees.

I have been researching labor laws but could not find any clause linking gratuity to EPF. I would appreciate any guidance on this matter as I do not have any sources to help me.

I look forward to a response. Thank you in advance.

Regards,
Kooleo

Dear Member,

Welcome to CiteHR. If this concern is covered under the Payment of Gratuity Act, 1972, then please go through section 4 for the calculation of gratuity for the employees.

R.N.Khola

Hi,

Calculation of Gratuity:

Gratuity = Current Monthly Salary (Basic + DA) x 15 x No. of yrs. of service / 26

Max. Gratuity payable under the Act is Rs. 3,50,000/-

15 - is known as 15 days' salary per year
26 - is known as workdays in a month

Thanks and regards,
Anil

The maximum gratuity payable under the Payment of Gratuity Act is not Rs 350,000 but it is Rs 10 lakhs.

Regards, Madhu.T.K

Hi,
1.If a person aged 60 years who’s getting retired and is working with the company for the past 1 .5 years -what would be the liabilities of the company towards the employee or what would be the employee benefits to be paid in this case- do we need to pay gratuity?
Anticiapting quick response.

For deciding whether or not an employee is eligible for gratuity under the Payment of Gratuity Act, the age of the employee is not the determining factor, but the length of his service is the determining factor. Therefore, if an employee is leaving the company after 1.5 years of service, he is not required to be paid any gratuity, even if he is aged 60 or older.

Regards,
Madhu.T.K

I would like to supplement as follows:

Ceiling of Gratuity Raised

The ceiling of gratuity has been raised from 3.5 lacs to 10 lacs. Payment up to 10 lacs is a tax-free payment. Anything beyond this limit is taxable, as the employer can pay more than 10 lacs as a gratuity payment.

Thank you,

Regards,
R K Nair

I was working with a bank and left the job by serving a notice period of 12 days instead of 3 months. The Full and Final Settlement (FNF) sent by my company states that I need to pay some amount. The calculation was perfect but was based on the Gross income. Please correct me if I am wrong because, as per my knowledge, the calculation is done based on the basic salary.

Secondly, the bank credited the full amount of gratuity to my account, and then the bank debited my account for the recovery amount without my permission. Can the bank debit my account directly without my consent?

Notice Pay Calculation

Salary for the purpose of calculating notice pay payable by either party need not necessarily be the basic salary alone. It shall include all other fixed components which are paid if the employee is on duty or on leave. This means that if there is a component which is paid purely based on attendance, then that can be excluded. Similarly, reimbursements may be excluded.

Gratuity and Notice Pay Adjustment

The bank is in error by collecting the notice pay from your gratuity amount because the gratuity amount is free from any lien, and the employer is not in a position to adjust any amount payable by the employee from the gratuity amount. This act of the bank management can be challenged.

Regards,
Madhu.T.K

Sirs,

My name is Shailesh Vaishnav from Ahmedabad. I joined a company on 15.07.2011 and left on 15.06.2016. My question is whether I am entitled to receive gratuity. There are various discussions ongoing, so I have provided the exact dates of my service period. Based on this information, could anyone guide me?

Thanks,
Shailesh Vaishnav

Hello sir,

I have worked in one engineering college for 5.8 years, 3.8 years on a fixed salary, and 2 years on payroll (6th pay scale). Am I eligible for gratuity? If yes, then how much amount can I get from the employer?

I resigned and was relieved in October 2015. When can I apply for it? My last month's salary details are as follows: BASIC 22250, DA 105%, grade pay 6000, gross 48800.