Gratuity Laws in India: Who is Eligible and How to Claim?

Gratuity is a statutory benefit provided to employees in India as a token of appreciation for their long-term service. It is a crucial part of retirement planning for many employees, offering a financial cushion after years of dedicated work. Governed by the Payment of Gratuity Act, 1972, gratuity is applicable to both private and public sector employees, provided they meet certain conditions. This article explores the gratuity laws in India, focusing on who is eligible to receive gratuity, how to claim it, and the legal framework that ensures its proper distribution.

What is Gratuity?

Gratuity is a lump sum payment made by an employer to an employee as a form of acknowledgement and gratitude for the employee’s years of service. It is typically paid at the time of retirement, resignation, death, or disablement of the employee. Unlike provident funds or pension contributions, gratuity is wholly paid by the employer, and it acts as a financial safeguard for employees when they leave an organisation after serving for a certain period.

Legal Framework: The Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 is the primary legislation governing gratuity payments in India. This Act covers employees engaged in factories, mines, oilfields, plantations, ports, railways, shops, or establishments where ten or more employees are employed. It is important to note that gratuity becomes payable only under certain conditions, and the law specifies the calculation method, eligibility criteria, and the process of claiming gratuity.

Who is Eligible for Gratuity?

Eligibility Criteria Under the Payment of Gratuity Act, 1972

To qualify for gratuity under the Act, an employee must meet specific criteria:

1. Five Years of Continuous Service: The employee must have completed at least five years of continuous service with the employer to become eligible for gratuity. This continuous service includes working without breaks, but it does allow for certain permissible interruptions such as holidays, strikes, and other legitimate reasons.
2. Age of Superannuation: Gratuity is payable upon retirement or superannuation, which refers to the age at which the employee is required to retire according to the rules of the organisation or under any statutory provisions.
3. Resignation: If an employee voluntarily resigns from the organisation after completing five years of continuous service, they are entitled to receive gratuity.
4. Death or Disablement: The five-year rule is waived in case of the employee’s death or if the employee becomes permanently disabled due to an accident or illness. In such cases, the gratuity is paid to the employee’s nominee or legal heir.
5. Fixed-Term Employment: Recent amendments to the Payment of Gratuity Act have extended eligibility to employees who have completed less than five years of service but are employed under fixed-term contracts. The gratuity for these employees is calculated based on their tenure, even if it is less than five years.

Exceptions to the Five-Year Rule

While the five-year continuous service rule is generally applicable, exceptions are made in cases where an employee dies or is rendered permanently disabled. In such situations, the gratuity becomes immediately payable without any regard to the employee’s tenure.

Seasonal Employees

For employees working in seasonal industries, such as agricultural workers or those employed in tourism-related jobs, the gratuity is calculated differently. These employees are entitled to receive seven days’ wages for each season worked, which differs from the standard fifteen-day’ wages formula applied to other employees.

Employer’s Responsibility

Organisations with at least ten employees must offer gratuity. Once the organisation falls under the scope of the Payment of Gratuity Act, it cannot be exempt from the law, even if the number of employees falls below ten at a later stage. The onus of payment lies with the employer, and failure to pay gratuity can lead to legal repercussions.

How is Gratuity Calculated?

Gratuity is calculated based on the employee’s last drawn salary and the number of years of service completed. The formula for calculating gratuity is as follows:

Gratuity=Last drawn salary×Number of years of service×15​/26

Where:

• Last drawn salary: The basic salary plus dearness allowance (DA) at the time of leaving the organisation.
• Number of years of service: The total number of years the employee has worked with the organisation.
• 15: Represents the number of days’ wages for each year of service.
• 26: Represents the number of working days in a month.

Example

Suppose an employee has worked for an organisation for 10 years and their last drawn basic salary with dearness allowance was ₹50,000. The gratuity calculation would be:

Gratuity=₹50,000×10×15​/26=₹2,88,461

In this case, the employee is entitled to receive ₹2,88,461 as gratuity.

Maximum Gratuity Payable

Under the Payment of Gratuity Act, the maximum gratuity payable is capped at ₹20 lakhs. This limit has been revised over the years to account for inflation and to provide more substantial financial benefits to employees. However, employers can offer gratuity amounts exceeding ₹20 lakhs if specified in the employment contract, but the excess amount may not be exempt from income tax.

Claiming Gratuity: The Process

Step 1: Application for Gratuity

When an employee becomes eligible for gratuity, they are required to submit a written application to their employer to claim the amount. The application must be made in Form I under the Payment of Gratuity Act. If the employee has died, the nominee or legal heir should apply on their behalf.

Step 2: Employer’s Responsibility

Once the application is received, the employer is obligated to calculate and provide the gratuity within 30 days. The employer must provide the payment within this timeframe, and any delays could lead to interest being payable on the outstanding amount. In cases where the employer disputes the employee’s eligibility for gratuity, they are required to inform the employee in writing.

Step 3: Payment of Gratuity

The gratuity is typically paid directly to the employee’s bank account or through another method mutually agreed upon by the employer and the employee. In cases of the employee’s death, the payment is made to the nominee listed by the employee. If no nominee is specified, the legal heirs of the employee are entitled to claim the gratuity.

Step 4: In Case of Disputes

In situations where the employer refuses to pay the gratuity or disputes the amount, the employee can approach the Controlling Authority under the Payment of Gratuity Act. The employee can file a grievance, and the Controlling Authority will investigate the matter. If necessary, the case can be escalated to the Labour Court for adjudication.

Tax Implications of Gratuity

Gratuity payments are subject to income tax in India, but there are certain exemptions that apply based on the employee’s status:

1. Government Employees:

Gratuity received by government employees is fully exempt from income tax.

2. Employees Covered Under the Payment of Gratuity Act:

For employees covered under the Payment of Gratuity Act, the least of the following amounts is exempt from tax:

• Gratuity received.
• ₹20 lakhs (as per the revised limit).
• 15 days’ wages for each year of completed service.

3. Employees Not Covered Under the Act:

For employees not covered under the Act, the least of the following amounts is exempt from tax:

• Gratuity received.
• ₹10 lakhs.
• 15 days’ wages for each completed year of service based on the employee’s average salary for the last 10 months.

4. Gratuity in Case of Death or Disability:

If an employee dies or is permanently disabled, the gratuity amount received by the nominee or legal heir is fully exempt from tax.

Nomination and Gratuity Claims

Under the Payment of Gratuity Act, every employee is required to nominate a person who will receive their gratuity in case of death. The nomination can be made using Form F under the Act. The following rules apply to gratuity nomination:

• Nominee Must Be a Family Member: If the employee has a family, the nomination must be made in favour of a family member.
• Third-Party Nominee: If the employee does not have a family at the time of nomination, a third party can be nominated, but this nomination becomes void once the employee acquires a family.
• Changes in Nomination: The employee can change their nominee at any time by submitting a written request to the employer.
• Distribution Among Nominees: The gratuity can be distributed among multiple nominees if specified by the employee.

Forfeiture of Gratuity

Gratuity can be forfeited under certain conditions, as outlined in Section 4(6) of the Payment of Gratuity Act. These conditions include:

1. Moral Turpitude: If the employee is found guilty of an offence involving moral turpitude, such as theft or embezzlement, the employer has the right to forfeit the gratuity.
2. Riotous or Disorderly Conduct: Gratuity can be forfeited if the employee engages in violent or riotous behaviour during their employment.
3. Damage to Employer’s Property: If the employee causes willful damage to the employer’s property, the gratuity can be withheld as compensation for the damages.

The forfeiture must be justified, and the employer is required to provide written reasons for the forfeiture. If the employee disputes the forfeiture, they can approach the Controlling Authority or the Labour Court for resolution.

Important Legal Precedents

Several landmark cases have shaped the interpretation of gratuity laws in India. Some notable cases include:

1. Dalmia Magnesite Corporation v. Regional Labour Commissioner (Central), 1996

In this case, the court clarified that gratuity is a statutory right, and an employer cannot withhold gratuity without a valid reason. The ruling reinforced the employee’s entitlement to gratuity upon meeting the eligibility criteria under the Payment of Gratuity Act.

2. Y.K. Singla v. Punjab National Bank, 2013

The Supreme Court ruled that gratuity cannot be forfeited simply on the basis of disciplinary action. The forfeiture must meet the stringent requirements set forth in the Act, particularly involving moral turpitude or damages to the employer.

Conclusion

Gratuity is a vital financial benefit provided to employees in India, governed by the Payment of Gratuity Act, 1972. The Act ensures that employees receive a lump sum payment for their years of service, offering a degree of financial security upon retirement, resignation, or other qualifying events. Employees who meet the eligibility criteria, especially those completing five years of continuous service, can claim gratuity from their employer.

The process of claiming gratuity involves submitting a formal application, and employees can approach the appropriate legal authorities if disputes arise. Tax exemptions, nomination rules, and forfeiture conditions are important aspects of the gratuity framework that both employees and employers must understand to ensure compliance with the law.