Sep 172014


Job-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched. If your thinking for your retirement plan GRATUITY is also one of important tool.

 Gratuity means:-

  • For employee:- Gratuity is a reward for long and meritorious service.
  • For legal dept / labour laws / labour unions:-In 1972 the government passed the Payment of Gratuity Act that made it mandatory for All employers with more than 10 employees to pay gratuity.
  • For employer:- Gratuity shall be payable to an “employee” on the termination of his employment after he has rendered continuous service for five years or more.
  • For accountant:- A defined benefit plan to be accounted as per GAAP given in IAS 19.

Here we are discussing GRATUITY from employee and employer point of view.

Who Are The Establishment Covered Under Gratuity Act

  • Every factory, mine, oil field, plantation
  • port, railways, shop & Establishments  OR
  • educational institution

 Employing 10 or more persons on any day of the preceding 12 months.

 In short provisions of gratuity act applicable to all commercial establishment having 10 employees in any time in its life. Once Gratuity act applies to an establishment, it shall continue to apply irrespective of change in performance, size and no of employees.

 Pre – Conditions for claiming gratuity:-

  • Gratuity is payable only if you have been with the employer for five years or more.
  • But this rule is waived if an employee dies or is disabled, superannuation, retirement or resignation.
  • In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.

Caution:- Here employees are defined as those hired on the company’s payroll. Trainees and interns are not eligible for this compensation. However, training period of permanent employees are covered under the act.

Further, in case of contractual employment, primary liability for payment of gratuity is of contractor. However, in case contractual employer is not able to pay gratuity,liability rest on employer in whose premises employee in working.

 Payment of Gratuity:-

  • Gratuity is normally payable to the employee himself.
  • In the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs.
  • In case the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Formula For Gratuity:-

i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months taking 26 days in a month.
iii) Rs 10 Lakhs

 Consequences of non-payment:-

It is the duty of the employer to determine the amount of gratuity as soon as it becomes payable and to give notice of the same to the person to whom gratuity is payable and also to the Controlling Authority. The employer shall also provide to pay the amount of gratuity to the person to whom it is payable. Failure to do so shall render him liable to pay the interest at the prevailing rate from time taken. In case the employee is not paid the due amount of gratuity he should apply, ordinarily within thirty days, in Form-I to the employer. Is an employer fails to pay due gratuity even after the receipt of notice in Form-1, the claimant employee or his nominee or legal heir, may within ninety days of the occurrence of the case for the application, should apply in Form-IV, to the Controlling Authority for issuing direction to the employer. After conducting the enquiry as prescribed, the Controlling Authority will determine the amount payable and direct the employer to make the payment. If the employer fails to comply with the direction the Controlling Authority can direct the Collector to recover the amount due and pay to the applicant.

The Act provides that whoever makes false statement for the purpose of avoiding any payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both. An employer who contravenes any provisions of the Act shall be liable for imprisonment for a term of not less than three months but which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees or with both. Where the offence relates to non-payment of gratuity the employer can be punished with imprisonment for a term which is not less than six months.

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