THE PAYMENT OF GRATUITY ACT, 1972

THE PAYMENT OF GRATUITY ACT, 1972 APPLICABILITY a. Every shop or establishment to which Shop & Establishment Act of a States applies in which 10 or more persons are employed at any time during the year and b. Any establishment employing 10 or more persons as may be notified by the Central Government. c. Once Act applies, it continues to apply even if employment strength falls below 10. ELIGIBILITY 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. Meaning of continuous service : Even when an employee is absent due to leave, accident, sickness, lay-off, lock-out or strike, the employee will be treated on ‘continuous service’. BENEFITS a. The quantum of gratuity is to be computed at the rate of 15 days wages based on rate of wages last drawn by the employee concerned for every completed year of service or a part thereof exceeding 6 month. If the employee has completed more than 6 months, it will be treated as full year for the purpose of gratuity calculation. b. The total amount of gratuity payable shall not exceed the prescribed limit. c. To get a benefit, employee should make an application in prescribed format. However, even if an employee does not apply for gratuity, the employer is under obligation to pay the same within 30 days from the date it becomes payable. d. Gratuity can be paid to nominee, if an employee dies. Amount of gratuity cannot be attached in execution of any decree under civil, revenue or criminal court. Disputes in case of gratuity must be referred to 'Controlling Authority' appointed by Government for this purpose. CALCULATION OF GRATUITY a. Gratuity = Last drawn Basic/26 x 15 days x No. of yrs. of service b. Maximum Gratuity payable under the Act is Rs.3,50,000/- (w.e.f.24th September, 1997). FORFEITURE / DEDUCTION OF GRATUITY : An employer can deny payment of gratuity, if an employee has been removed from service for riotous or disorderly conduct or other act of violence or for moral turpitude during employment of the company. Employer can deduct from the gratuity payable any amount of loss or damage caused to employer through omission or negligence of the employee. THE INCOME TAX PROVISIONS The employers were always concerned about the gratuity amount being allowed as expenses under the Income Tax Act. Earlier actual amounts paid by way of gratuity when a workman retired or gratuity amounts kept aside based on actuarial calculations every year were admissible expenses. The flaw was though the employer showed, the figure of accumulated gratuity in his balance sheet, it was notional and not necessarily that the amount was available when the time came for actual distribution, especially as and when the company closed down. As on today there are three ways, in which gratuity is regarded as an admissible expense under Income Tax Act: i) Payment actually made on worker's retirement ii) Amounts transferred by way of premia to the insurance companies under Insurance Companies Schemes iii) Contributions transferred to the Gratuity Trust of the employer duly registered and approved by the Income Tax Department. In the same manner gratuity amount upto Rs. Three and Half Lakhs in the hands of employees is exempted from Income Tax. COMPULSORY INSURANCE The Government's grand plan under the Gratuity Act is however to compel the private employers to obtain an insurance from the life insurance companies unless the employer has already established an approved gratuity fund and desires to continue such arrangement. Having done this, the employer shall have to register his establishment with the Controlling Authority, the appropriate Government framing rules for the composition of the Board of Trustees and recovery by the Controlling Authority of the amount of gratuity payable to an employee either from the Insurance Company or the Board of Trustees. There is a further provision of calculation of interest on the delayed payments to the Controlling Authority and in violation, payment of fine, which may extend to Rs.10,000/- and a further fine, which may extend to Rs.1,000/- for each day during which the offence continues. GRATUITY ACT, SECTION 4A However the provisions under Section 4A on compulsory Insurance have remained unimplemented. since Appropriate Government have not taken any steps to issue required notifications as provided POWER OF EXEMPTION : The Managing Trustee of that Gratuity Fund, which is established and approved by the Income Tax Commissioner, shall apply, for exemption from the provisions of sub-section (2) of Section 4-A of the Payment of Gratuity Act, 1972 (39 of 1972), to the Competent Authority appointed by the State Government, who will be not below the rank of Deputy Commissioner of Labour, along with the copy of their approved Scheme and all other documents prescribed under the Income Tax Act. (Rule 22) A Competent Authority, after perusing all the relevant papers, if satisfied, may grant exemption. The Managing Trustee shall be responsible to send an audited Balance Sheet to the Competent Authority appointed by the State Government every year. In case of default on the part of the Managing Trustee to submit the audited Balance Sheet as per sub-rule (3), the Competent Authority will be free to revoke exemption order by giving show cause notice (by registered post), after a period of one month from the date of the issue of such show cause notice, if no satisfactory reply is filed. INCOME TAX EXEMPTION : Gratuity received upto Rs.3,50,000/- is exempt from Income Tax. To whom Application can be made by Employee, Nominee or Legal Heir: The employee has to apply for gratuity (Form I) within 30 days from the date the gratuity becomes payable. But he can apply 30 days prior to superannuation or retirement where the date of superannuation or retirement is known. A nominee has to apply within 30 days (Form J) and the legal heir ordinarily within one year (Form K) from the date the gratuity becomes payable to him. However, it is not necessary that application must compulsorily be made in these forms. They can be even made on a plain paper and also entertained by the employer if the applicant adduces sufficient cause for delay in preferring his claim and no claim for gratuity shall be invalid merely because the claimant failed to present his application within the specified period. Any dispute in this regard shall be referred to the Controlling Authority for his decision. An application for gratuity shall be presented by personal service or by registered A.D. PENAL PROVISION 1. Whoever, for the purpose of avoiding any payment to be made by himself under this Act or for 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 for a term which may extend to six months, or with fine which may extend to Rs.10,000/- or with both. 2. An employer who contravenes, or makes default in complying with, any of the provisions of this Act or any rule or order made thereunder shall be punishable with imprisonment for a term (which shall not be 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.