Understanding Gratuity Law in India

Introduction

Gratuity is a statutory benefit provided to employees in India as a token of appreciation for their continuous service to an organization. It is governed by the Payment of Gratuity Act, 1972, which mandates employers to pay gratuity to employees who have completed at least five years of continuous service.

Gratuity is typically paid upon an employee’s retirement, resignation, or termination and is also given to the legal heirs in case of an employee’s death. The amount is calculated based on the employee's last drawn salary and the number of years of service.

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:

• 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.
• 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 organization or under any statutory provisions.
• Resignation: If an employee voluntarily resigns from the organization after completing five years of continuous service, they are entitled to receive gratuity.
• 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.
• 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.

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 organization.
• Number of years of service: The total number of years the employee has worked with the organization.
• 15/26: Represents the number of days’ wages for each year of service.

The Process of Claiming Gratuity

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. 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.

2. 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.

3. 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.

Role of Legal AI Assistance in Gratuity Compliance

With evolving labor laws and complex compliance requirements, legal AI tools such as LawSimpl.ai can streamline gratuity-related processes for businesses and professionals. LawSimpl.ai offers the following advantages:

• Automated Gratuity Calculations: AI-powered tools ensure accurate computation of gratuity based on applicable laws and salary structures.
• Legal Compliance Monitoring: Helps HR and legal teams stay updated with changes in gratuity laws and automatically adjust compliance policies.
• Gratuity Claim Assistance: Provides step-by-step guidance for employees on filing gratuity claims and ensuring compliance with legal requirements.
• Document Generation & Management: Automates the creation of gratuity claim forms, nominee declarations, and dispute resolution filings.
• Dispute Resolution Support: AI-based legal assistance helps professionals and employees understand their rights and provides pre-drafted legal templates for addressing grievances.

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 favor 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.

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 financial security upon retirement, resignation, or other qualifying events. Legal AI tools like LawSimpl.ai enhance compliance, automate documentation, and assist professionals in handling gratuity-related matters efficiently. As gratuity laws evolve, leveraging technology can ensure businesses remain compliant while employees receive their rightful benefits seamlessly.