How to Handle Gratuity Payments Without Official Registration? Seeking Advice

Gratuity Registration and Documentation Query

Our company has completed six years, and yet we have not registered for the Gratuity scheme. Recently, two of our employees left the job, and at the time of full and final settlement, I paid the gratuity amount as per the Act, and the management also agreed to pay that amount to them.

Now, my question is, our company is still not registered for Gratuity (due to some management issues), but we are paying the gratuity amount to the employee upon leaving the organization. In that case, which documents do I have to maintain for the employees' gratuity benefits, or which form do I have to fill up for them?

Please help.

Thanks & Regards,
Vaishali

In this case, you must develop some forms that ensure compliance with the rules and regulations of your institution. Additionally, you need to develop the financial statements of employers containing summaries as well as individual accounts. This process will also help you calculate the amount of gratuity for employees who quit.

I can help you devise the basic frameworks that will assist in this regard.

Regards,
Yasser

As per your query, you need to fill up Form-F for the nominee of gratuity. When an employee has completed 4 years and 9 months, they become eligible for gratuity.

Registration is only procedural, and non-registration does not absolve you of your responsibility to comply with the provisions of the Act. The following are the important compliances:

1. The employer has to submit details of opening his establishment in Form-A to the Controlling Authority within 30 days of the gratuity rules becoming applicable to him.

2. Any change in the name and address of the employer shall be communicated in Form-B.

3. The employer shall obtain a nomination from the employee in Form-F.

4. The employer shall display at or near the main entrance of the establishment a notice in bold letters in English or in a language understood by the majority of employees, specifying the name of the officer with designation who is authorized by the employer to receive notices under the Act on his behalf.

5. The employer is required to display an abstract of the Act and rules in Form-U in English or in a language understood by the majority of employees at a conspicuous place.

6. The employee shall make an application in Form-I for payment of gratuity within 30 days of it becoming payable. In case of employees, the nominee shall make the application in Form-J. In the absence of a nominee, the legal heir shall make such an application in Form-K.

7. The employer thereafter shall give notice of payment in Form-L within 15 days of receipt of such application.

8. If gratuity is not payable, the employer shall inform the employee/nominee about it in Form-M.

9. If the gratuity is payable, the employer shall arrange to pay it within 30 days from the date of it becoming payable.

Regards,
B. Saikumar
HR & Labour Law Consultant
Chipinbiz Consultancy Pvt. Ltd
Mumbai.

Thank you for sharing such important information. It is really helpful for all of us. Most of the forms we are not maintaining right now, but through such postings, we will be able to comply with all the provisions of the Act.

Thanks again!

Regards,
Atul S Malve
Manager - HR & Admin
Solapur.

I am working as an HR in a reputed organization. We do not currently have a gratuity scheme in place, but we are willing to implement one. Could you please advise me on the procedures for setting this up?

Thank you.

Thanks for the useful information. I still have some queries:

1. **Is it necessary to register gratuity with an insurance company?**

2. **Is it correct that our company is not registered, but we are providing gratuity to former employees?**

3. **If registration is required, what benefits will the employer receive under this scheme?**

With best regards,
Vaishali

Clarifications on Gratuity Payment and Policies

1. Even if it is not registered with the competent office, the employer has to give gratuity to employees when they become eligible for it.

2. It is up to the organization whether they want to cover the gratuity through any insurance policy or not. Covering the gratuity under an insurance policy provides financial benefits to the employer on investments made through the policy. However, it is not compulsory to do so. You can also pay the gratuity directly from your company accounts when it becomes due. You must not depend on the policy until releasing the payments after the gratuity claim for any particular case. It is just a supportive decision to make it through an insurance policy to cover the investments.

3. If your company opts for a Group Gratuity policy under any insurance company, you may have income tax exemptions up to a certain level, as well as interest on the invested amount through the group gratuity policy. For more information, you may consult with your seniors in Finance/Accounts.

I hope this has cleared your doubts.

Regards,
Atul S Malve
Manager- HR & Admin

Dear Mr. Atul, thanks for the clarification. It's really very good for me to get the clarification from you because I am a regular reader of all your quotes. All your posts and clarifications easily solve problems and provide clear answers too.

Query on Gratuity Calculation

I have one more query: as per the act, while calculating the gratuity amount, we have to take Basic + DA. However, in our salary breakup, we don't have a DA component. The components of our breakup are Basic, HRA, Conveyance, Medical, Educational Allowance, and other allowances. So, the last time while calculating the gratuity amount, I took Basic + other allowances (to give more benefits to the employee). Is this right? Please confirm.

Best Regards,
Vaishali

Gratuity is calculated on the last drawn basic salary. The formula to calculate the gratuity is as follows:

Last Drawn Basic Salary * 15/26 * Number of Years Completed

Thank you.

The Act states that you need to calculate gratuity at least based on the basic salary. However, there is nothing stopping the employer from calculating the gratuity based on the basic salary and any other allowances.

Also, I'm sure that if you are providing gratuity, you would have had the gratuity plan's actuarial valuation done. Please check with the actuary as they would have already completed the required calculations or at least be able to help you with it. If you need any assistance with the actuarial valuation, please let me know.

Thank you,

Ravi

Gratuity Insurance Requirements

In the year 1987, the Payment of Gratuity Act was amended, and a few new sections and sub-sections were inserted into the Act. By inserting sub-section 4.a, the Payment of Gratuity (Amendment) Act, 1987 has prescribed provisions for compulsory insurance for an employer's liability for payment towards gratuity under the Act from the Life Insurance Corporation of India, established under the Life Insurance Corporation of India Act, 1956, or any other prescribed insurer.

Now, it is not at the will of the employer to obtain or not to obtain an insurance policy. As of now, the employer has only two options available:
1. Obtain a gratuity insurance policy from a prescribed insurer.
2. Have its own approved gratuity fund with the composition of the Board of Trustees of the gratuity fund.

Regards,
Kamal

If you have not updated yourself, it does not mean the said amendment has not been notified. This amendment is effective from 1st October 1987. Please visit the India Code Updated Acts (Government of India website) to get details of all updated Acts and Laws, including the Payment of Gratuity Act 1972.

Dear Sasikumar,

I am working in an ITES company that is about 8 years old. To date, we have not registered our company under the Gratuity Act. Could you please guide me through the procedure and advise me on whom we need to reach out to for the same? Additionally, could you also advise me on whether we should proceed with an insurance company for a group gratuity policy? If we opt for a policy, does it fulfill the registration process under the act?

Regards,
Karthik

[Phone Number Removed For Privacy Reasons]

Hi Vaishali, Thanks for your compliments! For this clarification, please let me know the employee's cadre because if their wages are defined under the Payment of Wages Act and The Minimum Wages Act, their wages will include Basic + DA (Special Allowance as declared by the Government). So, both components should be considered for calculating the Gratuity.

In some salary components, we may not have a special allowance (DA) as a separate field, but in such a case, you need to ensure that the total Basic you are paying is not less than the minimum wages, i.e., Basic + Special Allowance (DA) as per the Government notification. If the Basic you are paying is higher than the minimum wages, then there is no need to consider other allowances in addition to Basic for Gratuity calculation.

However, considering the benefits to employees, it is good that you have considered Basic + Other allowance and defined a standard benchmark for Gratuity calculation for your organization, whichever cadre of employee it may be.

Regards, Atul S Malve Manager- HR & Admin

Dear seniors, I was informed by a senior that any employee who has not completed 5 years of service in the same company is not eligible for gratuity, and management is not required to pay. (We have a Gratuity Policy through LIC). Could you please confirm if this information is accurate?

Regards, Krishna

As per The Payment of Gratuity Act 1972, an employee who has completed continuous service for not less than five years will be eligible for gratuity at the rate of 15 days for every completed year of service. Accordingly, an employee who has not completed service for less than 5 years will not be eligible for gratuity, even though the gratuity payable is covered under any insurance policy or payable directly from the employer.

Regards,
Atul S Malve
Manager - HR & Admin

Sub- Gratuity

Dear Karthik, Sec. 4-A of the Gratuity Act 1972 requires an establishment to register itself with the Controlling Authority. However, sub-section (3) of Sec. 4-A makes it obligatory for the employer (excepting central or state government undertakings) to obtain insurance to enable the employer to discharge his liability to pay gratuity to the employees.

An employer can have its own gratuity fund with better terms than the gratuity envisaged under the Act or at least with terms not less favorable than the gratuity envisaged under the Act by seeking exemption from the Act under Sec. (5). In that event, Sec. 4-A also exempts establishments thus exempted from obtaining insurance cover.

Regards,
B. Saikumar
HR & Labour Law Consultant
Chipinbiz Consultancy Pvt. Ltd
Mumbai
[Phone Number Removed For Privacy Reasons]

Thank you for your timely input. If I am going to register our Gratuity Trust, what would be the procedure and which authority do I need to reach? Our Head Office is located in Chennai.

Regards,
Karthik. D

You have to register your establishment with the Controlling Authority at Chennai, who is normally an Assistant Labour Commissioner notified by the State Government (assuming the Government of Tamil Nadu is the appropriate government for you). So far as the procedure is concerned, the same is governed by the Gratuity Rules of Tamil Nadu. However, as per Rule 3 of the Central rule, an establishment within 30 days of the rules becoming applicable to it shall submit a notice in Form 'A' to the Controlling Authority. The procedure may be the same under Tamil Nadu rules. Please confirm this before proceeding to register.

Regards,
B. Saikumar
HR & Labour Law Consultant
Chipinbiz Consultancy Pvt. Ltd
Mumbai
Tel: [Phone Number Removed For Privacy Reasons]

Dear All,

My case is a little different. One of my employees, who worked as a casual worker for about six years, obtained permanent employment based on his educational qualifications. Subsequently, he served as an employee on a contract for another five years.

Now, he has resigned from the company. Although we do not have records of his casual work period, the accounting department has confirmed that they have payment vouchers on file.

Could you kindly explain how we should calculate his gratuity?

Regards,
Deepak Agarwal
Manager (HR & Admin)

The eligibility for gratuity is the completion of five years of continuous service if the individual is alive. In the event of their death, their nominee can still claim the gratuity benefit even after the completion of one year.

Regards,
Raju HR

Your ex-employee is eligible for gratuity totaling 11 years (6 years as a casual employee & 5 years as a regular employee).

Regards,
Kamal