How Do We Start Offering Gratuity to Employees and What Are the Key Steps Involved?

Dear all, we are an organization registered as a private limited company since 2008. We want to start providing gratuity for our employees. As far as I know, "gratuity is payable to employees who complete five years of continuous service in the organization." But how do we start this process?

I have reviewed the act as well. Can someone shed some light on the following points:

1. What is an insurance number referred to? Is it an ESIC number or something else?
2. What is the establishment of an approved gratuity fund? Does an organization need to register with any controlling authority for the same?

Please guide me on these matters.

Regards,

Payment of Gratuity Act, 1972

Applicability

- Every factory (as defined in the Factories Act), mine, oilfield, plantation, port, and railway.
- Every shop or establishment to which the Shops & Establishment Act of a State applies, in which 10 or more persons are employed at any time during the year.
- Any establishment employing 10 or more persons as may be notified by the Central Government.
- Once the Act applies, it continues to apply even if the employment strength falls below 10.

Eligibility

- Any person employed on wages/salary.
- At the time of retirement, resignation, or superannuation, an employee should have rendered continuous service of not less than five years.
- In the case of death or disablement, the gratuity is payable even if the employee has not completed five years of service.

Benefits

- The quantum of gratuity is to be computed at the rate of 15 days' wages (7 days' wages in the case of seasonal establishments) based on the rate of wages last drawn by the employee concerned for every completed year of service or a part thereof exceeding 6 months.
- The total amount of gratuity payable shall not exceed the prescribed limit.
- In cases where a higher benefit of gratuity is available under any gratuity scheme of the company, the employee will be entitled to the higher benefit.

Calculation of Gratuity

Gratuity = (Monthly Salary x 15 days x No. of years of service) / 26

Max. Gratuity payable under the Act is Rs. 3,50,000/- (w.e.f. 24-9-1997).

Penal Provisions

- Nonpayment of gratuity payable under the Act is punishable with imprisonment up to 2 years (minimum 6 months) and/or a fine up to Rs 20,000/-.
- Other contraventions/offenses attract imprisonment up to 1 year and/or a fine up to Rs 10,000.

Eligibility for Gratuity

- Five years of continuous service. Even if the service is 4 years 11 months, he/she is not eligible for gratuity.

Gratuity Formula

- Last drawn Basic/26*15 days * No of years service completed.
- If service is 5 years 6 or 7 months, gratuity should be calculated for 6 years.

Hope this would clear your doubts.

Thanks, Ajay, for providing a wonderful explanation. But I also want to know, as an organization, do we need to register anywhere to implement this in the organization, or can we simply pay gratuity when the time comes? Is there any legal process we need to complete as per the act? I have read in the act:

"For the purpose of effectively implementing the provisions of this section, every employer shall, within such time as may be prescribed, get his establishment registered with the controlling authority in the prescribed manner, and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2)."

Can you explain more on the same?

One More Query

What if the person has withdrawn different wages in each year? Will it be average wages (for the complete duration) for calculating gratuity?

Please help with the same. I would like to call other seniors in the forum to provide their views on the same.

Thanks!

Dear all,

Recently, it was in the news that the gratuity limit has been increased to up to 10 Lakhs. Is it true?

Regards,