The Gratuity Payment Act, 1972
- Payment of gratuity is mandatory by statute.
- Once the number of employees reaches 10 or more on any day of the last year, the company has to pay gratuity to its employees and will continue to pay gratuity even if the number of employees reduces to a number less than 10 in the future.
- Employee can receive the benefit of gratuity if and only if he provides a continuous service of 5 years or more. Gratuity can be given before the term of 5 years but only in the case when the employee dies or has became disabled due to any incident.
- Once the employee has served the continuous service of 5 years or more, he or she can get the gratuity when the employee resigns from the firm, or due to superannuation (when the maximum benefit limit is achieved) or when the employee decides to retire.
- The firms calculate the gratuity by the following formula –
15/26*N*B
Where N= number of years completed.
B= last drawn salary.
15/26 represents the 15 days wages for every completed year or part(in excess of 6 months) and 26 is the number of working days in a month. - After the implementation of 7th pay commission, maximum limit for the gratuity has been increased to Rs.20 lakhs (non taxable).
- According to income tax act 1961, deduction is applicable for the employer in the income tax for the gratuity payment or deposited in a fund for the year if and only if the employer can show the evidence of the deposit/payments made for the gratuity.
- According to section 4A of the Act, employer has to take insurance cover to cover the liability of the gratuity and if the employer is exempted to take an insurance cover, it should create a gratuity trust fund.
- To compute the Gratuity Liability of any company an Actuarial Valuation Report must be taken.
Author: Team Atmoz