Is gratuity mandatory in India? Even if not mentioned in Offer Letter

Sir, I am currently working private limited company. One employee recently resigned & have 8 years of experience. We didn’t mention gratuity benefits anywhere (Offer letter, payslip). Now he is requesting the gratuity.
The Company have to pay ?

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To adhere the statutory compliance of gratuity act, you are supposed to pay him gratuity amount. Else, you will face the heat if the employee knocks labour department

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Hi @prabufidens

In 1972 the Government passed the Payment of Gratuity Act and made it mandatory for all the employers with more than 10 employees to pay gratuity.

Payment of Bonus Act and Payment of Gratuity Act: Know your essentials.

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Hi Prabu,

Your description " Private Limited Co " refers to its constitution but fails to indicate what kind of establishment it is such as factory, mine, plantation or shop or establishment.

The Payment of Gratuity Act,1972 applies to every factory, mine, oil field, plantation, port and railway company without any restriction to its no. of employees, to every shop or establishment within the meaning of any law for the time being in force which employs currently or in the past not less than 10 employees and to every other such establishments specially notified by the Central Government in this regard.

Therefore, if your establishment falls within any one of the above category, you are statutorily bound to pay gratuity to every exiting employee with not less than 5 years of continuous service in your company within 30 days of his termination of employment. Otherwise, you will have to pay simple interest @ 10% p.a for every day’s delay.

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Gratuity is a lump sum that a company pays when an employee leaves an organization. It is one of the many retirement benefits offered by a company to an employee.

In India, gratuity rules and requirements are set out under the Payment of Gratuity Act, 1972 (the Gratuity Act). An employer may also choose to pay gratuity outside of that which is required by this Act.

The Payment of Gratuity (Amendment) Act, 2018 enables the government to raise the limit of tax-free gratuity. The change can be made through an executive order by the Prime Minister.

On 1 February 2019, India’s interim budget hiked the tax-free gratuity limit from rupees (Rs) 20 lakh (US$27,904) to Rs 30 lakh (US$41,856). The government had doubled the tax-free gratuity to Rs 20 lakh (US$27,904) in March 2018.

This article will cover India’s gratuity rules in terms of the following:

  • Applicability
  • Calculation
  • Tax exemption
  • Payment
  • Forfeiture

Applicability

The Payment of Gratuity Act, 1972 is applicable to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments with 10 or more employees. Gratuity is fully paid by the employer. No part of the gratuity comes from an employee’s salary.

To be eligible for gratuity under the Gratuity Act, an employee needs to have at least five full years of service with the current employer, except in the event that an employee passes away or is rendered disabled due to accident or illness. In these cases, gratuity must be paid.

Gratuity is paid when an employee:

  • Is eligible for superannuation
  • Retires
  • Resigns
  • Passes away or is rendered disabled due to accident or illness (if an employee passes away, gratuity will be paid to the employee’s nominee)

Gratuity Calculation Formula

Gratuity in India is calculated using the formula:

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

Note the following:

  • The ratio 15/26 represents 15 days out of 26 working days in a month
  • Last drawn salary = basic salary + dearness allowance
  • Years of service are rounded off to the nearest full year. For example, if the employee has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the calculation

Tax Exemption

Gratuity received under the Gratuity Act is exempt from taxation to the extent that it does not exceed 15 days of salary for every completed year of service calculated on the last drawn salary (subject to a maximum of US$41,856 or Rs 30 lakh).

Any other gratuity is exempt to the extent that it does not exceed one half-month salary for each year of completed service calculated on the basis of average salary for 10 immediately preceding months. The upper limit of US$41,856 applies to the aggregate of gratuity received from one or more employers in the same or different years.

India’s income tax department has put out a taxable gratuity calculator.

Payment

The employer must arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated.

If the amount of gratuity payable under the section is not paid by the employer within the period specified, it will have to pay simple interest on it from the date on which the gratuity becomes payable at the rate not exceeding the rate stipulated by the federal government.

Gratuity should be paid in cash or, if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.

Forfeiture

The gratuity payable to an employee must be wholly forfeited if:

  • The service of such employee has been terminated for his or her lawless or disorderly conduct or any other act of violence on their part
  • The service of such employee is terminated for any act that constitutes an offense involving moral turpitude, provided that such offense is committed by him or her in the course of their employment.

In order to forfeit gratuity of an employee, there must be a termination order containing charges as established to the effect that the employee was guilty of any of the aforesaid misconducts. In one case, it has been held that in the absence of a termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.

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Sir, Thank you so much for the brief clarification.

My company is a software-based company and previous years we have more than 20 employees. As per the current financial started employee count is 12 and now the count is 8.

Still our company eligible to pay the Gratuity.

Requesting to support this query too.

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Hi @prabufidens

You have to pay the Gratuity to an employee no matter what the employee count is or the financial condition of the Org. is at that point of time.

Once an employee enrolled into Gratuity and deductions start the same needs to be paid while he claims (subjected to Grautity eligibility conditions).

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Hi Prabu,

Once the PGA,1972 becomes applicable to any establishment to which the parameter of total no of employees is applicable, the Act would continue to apply notwithstanding the subsequent reduction in the no of employees.
Please refer to section 1(3-A) of the Payment of Gratuity Act,1972.

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Hi,

At this time the when the declarations submission dates have lapsed but employees may travel in the last month until 31st, how do they submit their LTA bills? Can they do it while filing ITR? Else what else is the solution?

Please clarify.

Thanks,

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Hi,

Please find the details below. Statutory benefits are applicable as per the Applicability of Law and not whether you have mentioned in Offer Letter or No

APPLICABILITY 10 OR MORE EMPLOYEES ARE EMPLOYED ON ANY DAY OF PRECEDING 12 MONTHS
ELIGIBILITY 5 YEARS OF CONTINUOUS SERVICE (4 YEARS 240 DAYS)
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Hi @avanti

If missed while submitting proofs, then ITR will be the only way to do so.

1 Like

Dear Sir,
Thanks for the details.

|APPLICABILITY|10 OR MORE EMPLOYEES ARE EMPLOYED ON ANY DAY OF PRECEDING 12 MONTHS

Please explain a little bit more, the above condition applies to employee count exceeding any year in the company tenure or it’s pertaining to any financial year or calendar year.

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Hi @prabufidens Once in tenure when a count crosses all the employees are eligible, later no matter what happens to the count they are entitled for the same.

And if Gratuity deductions happens in your company then they are 100% eligible for the same.

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Hello ,
This is a nice information that you shared.
Thank you so much for sharing.

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