Some Basics about Gratuity:
Gratuity Act is applicable to all establishments where the number of employees is 10 or more on any day of the preceding 12 months. Click here to download the Gratuity bare act.
Charitable institutes and hospitals are also covered under the act. It includes both commercial and non-commercial establishments like educational institutes, etc.
Only Basic and Dearness Allowance should be considered as wages for the purpose of Gratuity.
Gratuity Payment Formula:
Example: If an employee leaves the company after 10 years and his last Basic + Dearness Allowance is 10,000, then his gratuity will be paid as per the following formula:
(10000/26) * 15 * 10
Please note that the above formula will remain the same irrespective of the employee working in a 5-day-a-week establishment.
FAQ 1: Can an employee claim Gratuity even before completion of 5 years?
Yes, an employee can claim gratuity even before the completion of 5 years in the following cases:
- Death (to his nominees)
- Disablement
But the quantum of gratuity will be as per the act.
FAQ 2: Can an employer forfeit Gratuity, even if the employee has completed 5 years?
Yes, an employer can forfeit gratuity even if the employee has completed 5 years in the following cases:
- If the services of such an employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
- If the service of such an employee has been terminated for any act which constitutes an offense involving moral turpitude, provided that such an offense is committed by him in the course of his employment.
Please note that the above act should have been committed by the employee during his employment. There should be a proper inquiry held after which the employee was found guilty of the aforesaid act or misconduct. Once proved guilty, the employer should issue a termination note to the employee describing his misconduct.
FAQ 3: Gratuity Payment when an employee has completed 4 years and 240 days in the 5th year?
This is one of the most frequently asked questions, and there are various views available on it. In one of the cases, the Chennai High Court has held that an employee who has completed 4 years and 240 working days in the 5th year will be entitled to gratuity, i.e., 4 years, 10 months, and 11 days.
Although there is no amendment made in the gratuity act, hence the confusion. If you ask me, I will take it as, if your establishment is in Chennai, then 240 working days in the 5th year will be considered; else, you can only claim when you complete 5 years.
FAQ 4: Gratuity payment in case an employee has worked for more than 5 years with the same employer but in a different establishment?
Let's take an example: if an employee has worked in company ABC for 3 years and, due to some reason, he has been moved to company XYZ under the same management. The employee got his Full and Final from ABC Company but not the gratuity amount as he has not completed 5 years there. He has spent another 2.5 years in company XYZ and resigned. At the time of his Full and Final, will he be eligible for gratuity?
The answer is yes, as both companies are under the same management and the employee has completed 5.5 years together in both companies.
FAQ 5: Does a company need to take an insurance policy against LIC? Is it mandatory?
Gratuity payment is the responsibility of the employer. Nowhere in the act is it mentioned that the employer needs to take any sort of insurance policy for gratuity payment. Hence, it is up to the employer whether they want to take an insurance policy to cover its gratuity liability.
There are various benefits of taking an insurance policy from an insurance company to cover gratuity liability, let's say LIC:
- The employer ensures that its liability is taken care of by giving regular premiums to LIC.
- The employer gets a tax rebate against that payment.
- LIC also does life insurance for each employee; hence, in case of an employee's death, the employee's family gets the sum insured amount apart from gratuity.
FAQ 6: How much gratuity amount is exempted from income tax?
Up to Rs 10 Lacs. Click here to see the notification by the Income Tax department.
FAQ 7: Can a company refuse to pay gratuity due to financial loss to employees?
No, even if the company is not doing financially well, the company is bound to pay the gratuity amount. The company should ensure that it pays gratuity within 30 days from the date when gratuity becomes payable to an employee. Also, it is the responsibility of the employer to notify the employee about his gratuity payment even if the employee does not apply for the same. It is the employer's duty to pay the gratuity.
FAQ 8: Will an employee resigning from service or retrenched by the employer be eligible for Gratuity?
Yes, if they satisfy the criteria of completion of 5 years. In the case of an employee who has been retrenched after 5 years of continuous service, they will get both gratuity and retrenchment benefits.
FAQ 9: Gratuity in the case of a contractual employee. Who will be responsible to pay gratuity?
In the case of a contractual employee, the contractor is liable to pay gratuity, but if the contractor does not pay gratuity to the employee, then the principal employer can be directed to pay the gratuity amount.
FAQ 10: Will a trainee be entitled to Gratuity after completion of 5 years?
Yes. But employees who are hired for some temporary work should not be considered under the gratuity act.
FAQ 11: Is making gratuity a part of CTC correct?
This is another most debatable topic. Basically, CTC stands for cost to company, and every company takes it differently. Hence, it is up to the company whether they want to make it part of the employee's CTC or not.
There are two views:
One, an employee becomes eligible for gratuity only after the completion of 5 years, so how can a company make it part of the employee's CTC, and what if the employee does not complete 5 years and leaves the company before?
Second, as it is the liability of the employer to pay gratuity to the employee in two cases: 1) when the employee completes 5 years and 2) in case of death and disablement irrespective of completion of 5 years, hence the employee should make it part of CTC, especially when the employer has taken an insurance policy to cover gratuity liability.
FAQ 12: What is the ceiling of gratuity amount payment?
It is Rs 10 L. In case an employee's gratuity amount is more than 10 L, then the company is bound to pay a maximum of 10 L. In case the company wants to pay more than 10 L, then the company can pay it as a performance bonus or ex gratia. Click here to download the notification for the same.
FAQ 13: How to treat the number of months for the purpose of gratuity calculation after completion of 5 years?
For example, if an employee has worked for 5 years and 7 months, then for the purpose of gratuity payment, 7 months will be rounded off to a year, and he will get gratuity for 6 years. But in case the employee has worked for 5 years and 5 months, then he will be eligible for 5 years of gratuity payment only.
Gratuity Act is applicable to all establishments where the number of employees is 10 or more on any day of the preceding 12 months. Click here to download the Gratuity bare act.
Charitable institutes and hospitals are also covered under the act. It includes both commercial and non-commercial establishments like educational institutes, etc.
Only Basic and Dearness Allowance should be considered as wages for the purpose of Gratuity.
Gratuity Payment Formula:
Example: If an employee leaves the company after 10 years and his last Basic + Dearness Allowance is 10,000, then his gratuity will be paid as per the following formula:
(10000/26) * 15 * 10
Please note that the above formula will remain the same irrespective of the employee working in a 5-day-a-week establishment.
FAQ 1: Can an employee claim Gratuity even before completion of 5 years?
Yes, an employee can claim gratuity even before the completion of 5 years in the following cases:
- Death (to his nominees)
- Disablement
But the quantum of gratuity will be as per the act.
FAQ 2: Can an employer forfeit Gratuity, even if the employee has completed 5 years?
Yes, an employer can forfeit gratuity even if the employee has completed 5 years in the following cases:
- If the services of such an employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
- If the service of such an employee has been terminated for any act which constitutes an offense involving moral turpitude, provided that such an offense is committed by him in the course of his employment.
Please note that the above act should have been committed by the employee during his employment. There should be a proper inquiry held after which the employee was found guilty of the aforesaid act or misconduct. Once proved guilty, the employer should issue a termination note to the employee describing his misconduct.
FAQ 3: Gratuity Payment when an employee has completed 4 years and 240 days in the 5th year?
This is one of the most frequently asked questions, and there are various views available on it. In one of the cases, the Chennai High Court has held that an employee who has completed 4 years and 240 working days in the 5th year will be entitled to gratuity, i.e., 4 years, 10 months, and 11 days.
Although there is no amendment made in the gratuity act, hence the confusion. If you ask me, I will take it as, if your establishment is in Chennai, then 240 working days in the 5th year will be considered; else, you can only claim when you complete 5 years.
FAQ 4: Gratuity payment in case an employee has worked for more than 5 years with the same employer but in a different establishment?
Let's take an example: if an employee has worked in company ABC for 3 years and, due to some reason, he has been moved to company XYZ under the same management. The employee got his Full and Final from ABC Company but not the gratuity amount as he has not completed 5 years there. He has spent another 2.5 years in company XYZ and resigned. At the time of his Full and Final, will he be eligible for gratuity?
The answer is yes, as both companies are under the same management and the employee has completed 5.5 years together in both companies.
FAQ 5: Does a company need to take an insurance policy against LIC? Is it mandatory?
Gratuity payment is the responsibility of the employer. Nowhere in the act is it mentioned that the employer needs to take any sort of insurance policy for gratuity payment. Hence, it is up to the employer whether they want to take an insurance policy to cover its gratuity liability.
There are various benefits of taking an insurance policy from an insurance company to cover gratuity liability, let's say LIC:
- The employer ensures that its liability is taken care of by giving regular premiums to LIC.
- The employer gets a tax rebate against that payment.
- LIC also does life insurance for each employee; hence, in case of an employee's death, the employee's family gets the sum insured amount apart from gratuity.
FAQ 6: How much gratuity amount is exempted from income tax?
Up to Rs 10 Lacs. Click here to see the notification by the Income Tax department.
FAQ 7: Can a company refuse to pay gratuity due to financial loss to employees?
No, even if the company is not doing financially well, the company is bound to pay the gratuity amount. The company should ensure that it pays gratuity within 30 days from the date when gratuity becomes payable to an employee. Also, it is the responsibility of the employer to notify the employee about his gratuity payment even if the employee does not apply for the same. It is the employer's duty to pay the gratuity.
FAQ 8: Will an employee resigning from service or retrenched by the employer be eligible for Gratuity?
Yes, if they satisfy the criteria of completion of 5 years. In the case of an employee who has been retrenched after 5 years of continuous service, they will get both gratuity and retrenchment benefits.
FAQ 9: Gratuity in the case of a contractual employee. Who will be responsible to pay gratuity?
In the case of a contractual employee, the contractor is liable to pay gratuity, but if the contractor does not pay gratuity to the employee, then the principal employer can be directed to pay the gratuity amount.
FAQ 10: Will a trainee be entitled to Gratuity after completion of 5 years?
Yes. But employees who are hired for some temporary work should not be considered under the gratuity act.
FAQ 11: Is making gratuity a part of CTC correct?
This is another most debatable topic. Basically, CTC stands for cost to company, and every company takes it differently. Hence, it is up to the company whether they want to make it part of the employee's CTC or not.
There are two views:
One, an employee becomes eligible for gratuity only after the completion of 5 years, so how can a company make it part of the employee's CTC, and what if the employee does not complete 5 years and leaves the company before?
Second, as it is the liability of the employer to pay gratuity to the employee in two cases: 1) when the employee completes 5 years and 2) in case of death and disablement irrespective of completion of 5 years, hence the employee should make it part of CTC, especially when the employer has taken an insurance policy to cover gratuity liability.
FAQ 12: What is the ceiling of gratuity amount payment?
It is Rs 10 L. In case an employee's gratuity amount is more than 10 L, then the company is bound to pay a maximum of 10 L. In case the company wants to pay more than 10 L, then the company can pay it as a performance bonus or ex gratia. Click here to download the notification for the same.
FAQ 13: How to treat the number of months for the purpose of gratuity calculation after completion of 5 years?
For example, if an employee has worked for 5 years and 7 months, then for the purpose of gratuity payment, 7 months will be rounded off to a year, and he will get gratuity for 6 years. But in case the employee has worked for 5 years and 5 months, then he will be eligible for 5 years of gratuity payment only.