Tuesday, October 01, 2013

Provisions Relating to Gratuity

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Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

As per Sec 10 (10) of Income Tax Act, gratuity is paid when:
a)      Any person employed on wages/salary.
b)      At the time of retirement or resignation or on superannuation, an employee should have rendered continuous service of not less than five years,
c)       In case of death or disablement, the gratuity is payable, even if he has not completed 5 years of service.

["Continuous Service" means uninterrupted service and includes services which is interrupted by sickness, accident leave, lay off, or cessation of work not due to any fault of the employee concerned, whether such interrupted or uninterrupted services was rendered before or after the commencement of this Act.
An employee, who is not in uninterrupted service for one year, is deemed to be in continuous service if he has been actually employed by an employer during the twelve months immediately preceding the year for not less than 240 days. In case of employee employed below the ground in a mine, the required number of days is 190.]
a)      Applies to whole India except J&K.
b)      Every factory (as defined in Factories Act), mine, oilfield, plantation, port and railway.
c)       Every shop or establishment to which Shops & Establishment Act of a State applies in which 10 or more persons are employed at any time during the year end.
d)      Any establishment employing 10 or more persons as may be notified by the Central Government.
e)      Once Act applies, it continues to apply even if employment strength falls below 10.

 How does it work?
An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.

The main provisions of the Payment of Gratuity Act, 1972 are:-
a)      Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:- (i) on his superannuation; or (ii) on his retirement or resignation; or (iii) on his death or disablement due to accident or disease, provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

b)      The employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of six months.
In the case of a monthly rated employee, the fifteen days' wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen. While, in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account.

c)       For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the reduced wages.

d)      The gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused. The gratuity payable to an employee may be wholly or partially forfeited:- (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part; or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

e)      If the amount of gratuity payable under this Act is not paid by the employer, within the prescribed time, to the person entitled thereto, the controlling authority shall, on an application made to it in this behalf by the aggrieved person, issue a certificate for that amount to the Collector, who shall recover the same, together with compound interest thereon at such rate as the Central Government may, by notification, specify, from the date of expiry of the prescribed time, as arrears of land revenue and pay the same to the person entitled thereto.

f)       Whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other person to avoid such payment, knowingly makes or causes to be made any false statement or false representation, shall be punishable with imprisonment or with fine or with both. Also, if an employer contravenes or makes default in complying with any of the provisions of this Act or any rule or order made there under, shall be punishable with imprisonment or with fine or with both.

g)      Maximum Gratuity payable under payment of gratuity act, 1972 is Rs. 10, 00,000.

Tax treatment of gratuity
The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessee’s. 
For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories –

(a) Government employees and
(b) Non-government employees covered under the Payment of Gratuity Act, 1972
(c) Non-government employees not covered under the Payment of Gratuity Act, 1972

Government employees and employee of a local authority
Employees covered under
Gratuity Act
Employees not covered under
Gratuity Act
Fully exempt
Minimum of the following 3 limits:
Minimum of the following 3 limits:
(1)          Actual gratuity received, or
(1)          Actual gratuity received
(2)          15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or
(3)          Rs. 10,00,000
(2)          Half months average salary of each completed year of service.
(3)          Rs. 10,00,000

Meaning of Salary:
(i)            Basic salary plus Dearness allowance.
(ii)           Last drawn salary (average salary of preceding three months in case of piece rated employee)
(iii)          No. of days in a month to be taken as 26
Meaning of Salary:
(i)            Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.

(ii)           Average salary of last 10 months preceding the month in which event occurs.

(iii)          Only completed year of service is to be taken.