23 facts one should know about Gratuity Act in India!!
Some Basics about Gratuity:
- Gratuity Act is applicable to all establishments, where number of employees, are 10 or more in any day of the preceding 12 months. .
- Charitable institutes and hospital are also covered under the act.
- It includes both commercial and non commercial establishment 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 leave company after 10 years and his last Basic + Dearness allowance is 10000 then his gratuity will be paid as per following formula.
(10000/26)*15* 10
Please note that above formula will remain same irrespective of employee working in 5 days a week establishment.
FAQ 1: Can an employee claim Gratuity even before completion of 5 years?Yes, An employee can claim gratuity even before completion of 5 years in followings cases:
- Death (to his nominees)
- Disablement
But the quantum of gratuity will be as per act.
FAQ 2: Can employer forfeit Gratuity, even if employee has completed 5 years?
Yes, employer can forfeit gratuity even if employee has completed 5 years in following cases:
- 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
- If the service of such employee have been terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him in the course of his employment.
Please note that above act should have been committed by employee during his employment. There should be a proper enquiry held after which employee was found guilty for aforesaid act or misconduct. Once proved guilty, employer should issue termination note to employee describing about his misconduct.
FAQ 3: Gratuity Payment when employee has completed 4 year and 240 days in 5th year?
This is one the most frequently asked question and there are various views available on it.
In one of the case, Madars High Court has held that an employee who has completed 4 years and 240 working days in 5th year will be entitled for gratuity i.e. 4 years 10 months and 11 day.
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 Madaras then 240 working days in 5th years will be considered else you can only claim when you complete 5 years.
FAQ 4: Gratuity payment in case employee has worked for more than 5 years with same employer but in different establishment?
Let’s take an example, that if an employee has worked in a company ABC for 3 years and due to some reason, he has been moved to company XYZ under same management. Employee got his Full and Final from ABC Company but not the gratuity amount as he has not completed 5 years there. He has spend another 2.5 years in company XYZ and resigned. At the time of his Full and final, will he be eligible for gratuity?
Answer is yes as both the companies are under same management and employee has completed 5.5 years to gather in both companies.
FAQ 5: Do company need to take insurance policy against LIC? Is it mandatory?
Gratuity payment is responsibility of employer. Nowhere in act, it is mentioned that employer need to take any sort of insurance policy for gratuity payment. Hence it is up to employer whether they want to take insurance policy to cover its gratuity liability.
There are various benefits of taking insurance policy for insurance company to cover gratuity liability, let’s say LIC:
- Employer ensure that its liability is taken care by giving regular premium to LIC
- Employer get tax rebate against that payment.
- LIC also do life insurance for each employee hence in case of employee’s death, employee family get sum insured amount apart from gratuity.
FAQ 6: How much gratuity amount is exempted from income tax?
Upto Rs 10 Lacs.
FAQ 7: Can a company refuse to pay gratuity due to financial Loss to employees?
No, even if company is not doing financial well, company is bound to pay gratuity amount.
Company should ensure that it pays gratuity within 30 days from the date when gratuity become payable to an employee. Also it is responsibility of employer to notify employee about his gratuity payment even if employee do not apply for same. It is employer duty to pay the gratuity.
FAQ 8: Will an employee resigning from service or retrenched by employer will be eligible for Gratuity?
Yes, if they are satisfying the criteria of completion of 5 years. In case of employee who has been retrenched after 5 years of continuous service will get both gratuity and retrenchment benefits.
FAQ 9: Gratuity in case of contractual employee. Who will be responsible to pay gratuity?
In case of contractual employee, contractor is liable to pay gratuity but if contractor do not pay gratuity to employee then principal employer can be directed to pay the gratuity amount.
FAQ 10: Will trainee be entitled for Gratuity after completion of 5 years?
Yes. But employees who are hired for some temporary work should not be considered under gratuity act.
FAQ 11: Company making gratuity as part of CTC is correct?
This is another most debatable topic. Basically CTC stands for, cost to company and every company takes it different way. Hence, it is up to company whether they want to make it part of employee CTC or not.
There are two views:
One, employee become eligible for gratuity only after completion of 5 years so how come company can make it part of employee CTC and what if employee do not complete 5 years and leave the company before.
Second, as it is liability of employer to pay gratuity to employee in two cases: 1) when employee competes 5 years and 2) in case of death and disablement irrespective of completion of 5 years hence employee should make it part of CTC especially when employer has taken 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 gratuity amount is more than 10 L then company is bound to pay max 10 L. In case company want to pay more than 10 L then company can pay it as performance bonus or ex gratia.
FAQ 13: How to treat 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 an year and he will get gratuity for 6 years but in case employee has worked for 5 years and 5 months then he will be eligible for 5 years gratuity payment only.
FAQ 14: What is the procedure to be followed in case an employer is not paying gratuity to employee or terminating employee services intentionally for purpose of non payment of gratuity.
I would suggest, that employee in such cases should send a letter to employer through registered post mentioning about his employment with organization and asking for gratuity amount. In case, there is no reply from employee then another letter through registered post should be sent where employee should given reference of first letter and ask for reply. Employee should also mention that in case employer do not reply then in that case employee is left with only one option- approaching labour court.
Employee should keep copy of correspondence with employer. I am sure that in many cases, you will receive reply or your gratuity amount from employer. But, in case there is no action taken by employer then you should approach competent authority of their region to file a case.
FAQ 15: Gratuity is part of my CTC. I have left company before completing 5 years. Can I claim my gratuity as it was mentioned in my CTC.
Gratuity is payable only when an employee completes 5 years of continuous service. If an employee leaves company before 5 years then employee is not eligible for gratuity irrespective whether same was part of employee CTC or not.
FAQ 16: I have resigned on 1st Jan 13 and will leave by 30th Jan 13. I will complete 5 years by 20th Jan 13. Will I be eligible for gratuity as I am under notice period? Is it related to my resignation anyways?
To calculate number of years employment, employee’s date of joining and date of leaving is considered and it has nothing to do with date of resignation. In above case, employee will be eligible for gratuity as employee will leave after completing 5 years.
FAQ 17: One of my friend was working with XYZ company on probation period for 1 year and after completion of probation period he got confirmation letter from Management. His total tenure of service was 5 years 3 months (Including Probation Tenure). In view of above scenario, I would like to know about whether he is eligible for Gratuity? Should we consider Probation period/ training period etc. for completion of 5 years of service while computing Gratuity Payment to the concerned employee?
Probation period is considered while calculating eligibility for gratuity.
FAQ 18: Can an employee claim gratuity after completion of 5 years without leaving the organization?
Gratuity can only be claimed once an employee leaves the organization and not in between.
FAQ 19: After an employee leaves organization, in how many days a company should pay his gratuity amount?
Max within 30 days.
FAQ 20: If an employee left us after 5 years without claiming gratuity as part of exit ( I read in gratuity act that he has to make a written request), completed all exit formalities and left. Can he come back and claim gratuity after 3 or 4 years. Is there a time period when he should make the request. What is the liability of the company in such cases?
Gratuity payment is employer liability hence employer need to ensure make payment along with Full and final of employee irrespective whether employee claims it or not. Employee can claim Gratuity any time after exit. This has been the result from many high courts’ verdict on the issue.
FAQ 21: A person worked for ABC company in India. He was sponsored by xyz company in USA on H1 (local work visa) and went to USA for 6 months and was paid by XYZ company in USA. No payroll was run for him in India during that time and hence has a break in payroll in India. Employee returned back to India due to personal reasons and joined back in ABC company. ABC and XYZ companies have two directors in common. So do we need to consider this as continuous employment and pay him gratuity? He signed different agreements with ABC and XYZ companies as per local laws.
Only because the directors of both company is same does not establish relationship with respect to continuous employment especially when employee had different agreement with ABC and XYZ company. Hence as per my opinion, it should not be considered as continuous employment hence gratuity is not applicable.
In case company ABC has given transfer letter to you to work in XYZ company then you can claim gratuity.
FAQ 22: I worked in company ABC for 3 years and then company name changed to XYZ where I have continued and worked for 4 years. We did not have to resign from company ABC and nor did we have to join in company XYZ. There was no new joining letter, no new terms and conditions. Company management also remained same. Salary account created by the company ABC also remained the same.Now after my resignation, the company has not paid my gratuity even after one month. For claiming gratuity in form ‘I’, shall I write the employer name as Company ‘XYZ’ or ‘ABC’ or ‘XYZ (earlier ABC)’.
Company has to pay you your gratuity amount as you are very well eligible for gratuity. Your total tenure is 7 years. You can write to company through registered with AD asking to pay your gratuity amount. In case company do not revert to your letter then you can approach labour office and file your claim.
FAQ 23 : I have worked with a company called “X Pvt Ltd” registered in India for 7yrs and now I’m moving to our USA office (same company registered as “X Inc” in USA). I’ll be a permanent employee in USA from now and on US payroll. I’m no longer an employee of company X registered in India. Am I eligible for gratuity now?
Yes, As you have complete more than 5 years in India, you can claim your gratuity now.
