Gratuity is monetary statutory benefit paid to the employees by the employer for the services rendered by them to the organization. A continuous service for at least five years is mandated by law to be eligible for gratuity. The benefit gratuity is payable to an employee on cessation of employment (either by resignation, death, retirement or termination, etc).
The gratuity amount is fully paid by the employer. There is no any contribution from the employee.
An employee shall be said to be in continuous service for a period if he/she has, for that period, been in uninterrupted service and includes service which may be interrupted on account of sickness, accident, leave, absence from duty without leave, lay off, strike or a lock-out or cessation of work not due to any fault of the employee.
Note : The Madras High Court has passed a judgment wherein 4 years and 240 days in the last year was also considered to be eligible for Gratuity. Some companies also follow this rule.
An employer can give more gratuity than the amount arrived by the Government prescribed formula.Gratuity payment liability of the employer increases with an increase in the salary and tenure of employment.However most companies usually follow the formula laid by the Government.
For Gratuity calculation, your last drawn salary is considered.
Covered under Gratuity Act
15 days salary for every 26 days of the month.( Month has 30 days so considering 4 week off . We get 26 days)
Part there of means after completion of the stipulated 5 years , the years of service are rounded off to the nearest integer.
Not Covered under Gratuity Act
Organizations who are not covered under the act can also give gratuity to their employees.
Here years of service are not rounded off.
The pre requisite of completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
In the case of death of the employee, gratuity payable to him shall be paid to his nominee ( as per family definition) or, if no nomination has been made, to his/her heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.
Family means Self , Spouse, Children (whether married or unmarried), Dependent Parents ( Self and Spouse), widow and children of his predeceased son.
Payment of gratuity is a statutory requirement. In case an employer fails to pay gratuity amount to an employee, he shall liable for punishment with imprisonment and the employer would also be required to pay a monetary penalty. If the amount of gratuity is not paid by the employer the aggrieved person should make an application to the Controlling Authority under the Payment of Gratuity Act within the area where the employer’s establishment is situated.
Forfeiture of Gratuity
The gratuity shall be wholly or partially forfeited to the extent of the damage or loss so caused for employees whose services has been terminated on account of :
- Any act, willful omission or negligence causing any damage/loss/ destruction to any asset or property belonging to the employer.
- Any riotous or disorderly conduct or any other act of violence on his part, or
- Any offence involving moral turpitude committed by him/her in the course of his/her employment.
Below is the tax treatment for Gratuity.
Note : As per Gazette notification issued by Ministry of Labour & Employment dated 29th March 2018 following amendments is made in the ceiling under Payment of Gratuity Act, 1972 specifies that the amount of gratuity payable to an employee under the said Act shall not exceed Twenty Lakh rupees.
Further, for the purposes of calculation of continuous service for the payment of gratuity to employees who are on maternity leave, the Central Government has specified that the total period of maternity leave shall not exceed 26 (twenty-six) weeks.
Note : If employee has already availed the exemption under this section in any previous years due to the retirement of previous employer and now again he is retiring from present employer then the max limit of Rs 1000000/- would get reduced from the amount which he has already got exemption .
Gratuity received in excess of the above amounts is taxable and is included in the gross salary for the purposes of taxation. You can claim this exempt from tax only once in life time. In case of death of the employee, the entire amount is non-taxable. However, if death occurs after the gratuity is due then excess of the above amounts is taxable.
Actuarial Gratuity calculation
Actuarial Gratuity valuation as per Accounting Standard (AS) 15 (revised 2005) is required to be done by companies by a certified actuary, atleast on annual basis. It reflected in the balance sheet.
A company is liable to pay the gratuity to all the employees who leave the services of the company after completing 5 years of service (4 years 240 days) in the same company.
The gratuity amount payable to an employee is a liability to the company. Hence the company makes provision in the books of accounts showing the gratuity accumulation as liability of the company against concerned employee. The company makes this provision as liability in the P&L account. A liability when an employee has provided service in exchange for employee benefits to be paid in the future
This provisioning helps the company as they have made provision for gratuity payment that on a future date may be paid to eligible employee. They are not burdened with the gratuity payment expenses as their books of accounts have already taken consideration for the future payments.