Gratuity – Everything You Need to know about it

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Gratuity is a benefit which an employee gets when his employment comes to an end due to the retirement or superannuation. It is an amount as a lump sum payment which is paid by an employer to his employee for his past services rendered for not less than 5 years. The payment of gratuity is a statutory right of the obligation of the employers and a statutory right of the employees as per the payment of Gratuity act, 1972.

 The condition of completion of 5 years continuous service is however not essential in case of termination of employment due to death or disablement.

Applicability of gratuity act:

The act applies to every factory, mine, port, oilfield, plantation, Railway Company and to such establishments in which 10 or more employees are employed on any day of the preceding 12 months. Once this act becomes applicable to any establishment, it will continue to govern by it even if the number of employees falls below 10 after the application of the Act.

Generally, gratuity is payable to employee himself. However, in case of death of employee, it shall be paid to the nominee and where no nomination is made by employee, to his heirs.

Procedure for payment of Gratuity

  • The employee who is eligible to receive gratuity shall make an application within 30 days of the payment becoming due in Form I to the employer.
  • The nominee of employee eligible to receive gratuity shall make an application in form J to the employer.
  • The Legal heir of the employee shall make an application in form K to the employer to receive the gratuity.
  • However the application even after prescribed time shall be entertained by the employer, if the sufficient cause for the delay has been mentioned in the application.
  • Within fifteen days of the receipt of an application for payment of gratuity, the employer shall issue a notice in Form L to the applicant employee, nominee or legal heir, as the case may be, specifying the amount of gratuity payable and the date on which gratuity will be paid.
  • Gratuity can be paid in cash or in demand draft or bank cheque to the claimant.
  • The amount of gratuity depends on the tenure of service and last drawn salary.
  • The employer must pay the gratuity within 30 days from the date it becomes due, else the employer shall pay the simple interest on the gratuity amount from the date on which gratuity becomes payable till the date on which it is paid.
  • If an employer makes a default in the payment of gratuity, he will be punished by an imprisonment for at least 6 months or a fine of Rupees 10000 or both.
  • In case of non-payment of gratuity, the employer will be punished by an imprisonment of 6 months which can extend up to 2 years.

Calculation of amount of gratuity exempted from tax:

As per income tax act, entire amount of gratuity received by a Government employee is fully exempt from tax. And for non-government employees covered under the Gratuity Act, the least of the following amounts is exempt from Tax:

  • 15 days salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months. Here, salary includes basic pay and dearness allowance.
  • Rupees 10 Lakhs.
  • Gratuity actually received.

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An MBA in finance, I like to cover the wide range of topics related to Taxation, SEBI, Finance and anything that is Public Helpful. The motive is always to make it simpler for the taxpayers understand the system better and take informed decisions.

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