Gratuity is the monetary bonus given by an employer to an employee in exchange for services performed for the company. It is paid at the time of retirement or resignation, assuming the person has worked for the company for at least five years. The rule of continuous 5-year service is waived in some circumstances, such as death or disability. It is derived from “gratuitous”, which means a gift or a present. However, it attains a statutory status and thus ceases to retain as a gift making it a compulsory social obligation towards the employee. Any strong and long-running business owes its existence to its employee. They are the face of the organization, and their strength, fidelity and emotional attachment make a business earn profits and build a reputation.
Gratuity acts as a source of motivation and recognition for the employees associated with the organisation for a considerable period. It not only signifies a monetary component but is a representation of gratitude towards the employee by the employer. It is one of the several components that comprise an employee’s gross salary. In India, gratuity payment is regulated by the Payment of Gratuity Act, 1972 , which is functional for all mines, factories, oilfields, plantations, ports, railways and any other establishment under the ambits of law consisting of at least ten employees on any day throughout twelve years. Once the Act gets enacted in the organisation, it would be in force even if the workforce decreases below ten.
What are the Rules of Payment of Gratuity?
No employer at their sweet will can withhold the gratuity payment of any employee, thus making it a mandatory obligation if the Act is applicable. Any delay in such payment can lead to imprisonment for not less than six months and can extend up to two years. As per Section 4(1) of the Payment of Gratuity Act, 1972 , any employee who has rendered service to the organisation for not less than five years or superannuation is entitled to gratuity on their retirement resignation, death or disablement. The employer can make payment in either of the two ways:
- Through own account
- General gratuity insurance with a service provider in which annual contributions are made to the appointed service provider. In return, the gratuity is paid to the employee by the insurance company.
In the modern era of business transfers and mergers, a huge confusion is created regarding payment of gratuity to employees who have rendered their service for not less than five years to any concerned business organisation. In the case of Bombay Garage v Industrial Tribunal, the Apex court held that by transferring a firm to another person or another limited company, an employer could not deprive their employees of the benefits that have accrued to them as a result of previous services.
How is the Amount of Gratuity calculated?
Employers can mathematically calculate the amount of gratuity they are required to pay after considering the last salary drawn by the employee (including dearness allowance) and the number of years the employee has served the organisation.
Gratuity = N*S *15/26
Where N is the number of years, and S is the last salary withdrawn.
So, for example, an employee works for 15 years in a company, and the last drawn salary, including dearness allowance, is Rs. 25000. According to the mathematical interpretation, the gratuity to be paid will amount to Rs. 216346.154.
Under what Circumstances can an Employer forfeit Gratuity?
According to Sec 4(6) of the Payment of Gratuity Act,1972 , an employee can prohibit the gratuity under the mentioned circumstances:
- The gratuity of an employee whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer shall be forfeited to the extent of the damage or loss so caused;
- The gratuity payable to an employee may be wholly or partially forfeited if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part or if the benefits of such employee have been terminated for any action which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.
Is Income Tax exempted on Gratuity?
Section 10(10) of the Payments of Gratuity Act, 1972  states the different provisions and conditions of income tax exemption. If an employee receives their gratuity during employment, it is fully taxable. However, if gratuity is received in cases of death, retirement or resignation, then exemption can be made available.
IN CASE OF GOVERNMENT EMPLOYEE
Gratuities received by federal government employees, state governments, or local governments are tax-free. Employees of Statutory Corporation are not eligible for this exemption.
IN CASE OF ANY OTHER EMPLOYEE
Employees protected by the Act are entitled to a tax-free gratuity, subject to specific circumstances. The amount equivalent to the least of the following is tax-free.
- Gratuity amounting to Rs 10 lakhs;
- The actual amount of gratuity received
- Salary equivalent to 15 days of service for each year completed
Suppose an employee receives gratuity from more than one employer in the same previous year or different previous years. In that case, the total amount exempt from tax on gratuity cannot exceed Rs. 10,00,000. If an employee has previously worked for another company, the time of service with that company is considered to calculate the “completed year of service,” provided that no gratuity is received from that company. It must be paid to the employee’s nominee or legal heir in the event of the employee’s death. The exemption is calculated in the same way as before, and the receiver is taxed under the heading “Income from Other Sources.”
Ways in which Court can punish the Employer for non-payment/withholding of Gratuity?
A person can approach the “Controlling Authorities” stated under Section 3 of the Payment of Gratuity Act,1972 , which are recognized as “quasi-judicial” bodies, thereby giving them the powers to adjudicate these matters. After the issue of notice, hearing of the case and examining the facts, the authority can direct the employer to pay the required amount of gratuity and the specified rate of interest imposed by the central government. The employer is given 30 days to pay the gratuity amount and the interest rate, failing which the central or the local government, whosoever concerned, can start prosecution.
If the employer exceeds the prescribed time limit of 30 days, penalties can be imposed under section 9 of the Payments of Gratuity Act,1972 . At the discretion of the controlling authority, the employer can be subject to imprisonment for up to 6 months which can be extended to 2 years. Imprisonment can also be imposed on the employer if any false accusation or statement is made for non-payment of gratuity.
The main area of concern of gratuity was to support workers and employees after rendering services to the organisation for five years or more. The Karnataka High Court, in the judgement Irel (India), limited vs P. N. Raghava Panicker , held that workmen and employees also include “trainees”. Section 2(e) of the Payments and gratuity Act,1972 describes “employee means any person (other than an apprentice)”. Further, the Court also stated that an employee could not extract regular work from a person and deny them gratuity by stating them as a “trainee”. The Act is a welfare statute that guarantees every employee their gratuity right except apprentice during their training period. In addition to the general criteria, the CourtCourt, in its judgement of the Lourdes Hospital, that irrespective of whether the organisation makes a profit or not, it is entitled to make gratuity payments to its employees and hence private organisations are included under this Act because their business is a continuous and frequent activity. An employee is duty-bound to pay gratuity to their employee unless there is moral turpitude on the part of the employee. This was held in the case of Jorsingh Govind Vanjari Vs. Divisional Controller Maharashtra, State Road Transport Corporation  that alleged misconduct on the part of the employee is not sufficient for non-payment of gratuity until and unless it involves a question of moral turpitude.
While dealing with forfeiture of gratuity on account of a pending civil dispute, the Supreme Court of India in R. Kapur v. Director of Inspection (Painting and Publication) Income Tax and Anr.  imposed a penalty of 18 (eighteen) per cent on the employer and observed that death cum retirement gratuity cannot be withheld merely because a claim for damages is pending. In this instance, the employer sought damages for the employee’s improper use of their official position. The Supreme Court upheld the commission’s ruling in Secretary, ONGC Ltd. v. V.U. Warrier,4, in which it was held that the commission might recover dues owed by any official from his gratuity amount without getting his consent. As a result, the Apex Court concluded that if an employee occupies the accommodation (i.e., the quarter) for a more extended period than specified, the imposition of penal rent would be a “natural consequence” and that such penal rent might be offset against his dues, including gratuity.
What are the Advancements made during the Pandemic?
In the wake of the covid-19 pandemic leading to an economic breakdown, a parliamentary panel in its Social Security Code has suggested reducing the duration of gratuity payment from 5 years to 1 year. Headed by Biju Janta Dal MP Bharatruhari Mahtab, the committee further recommended including daily wage earners, contract labourers and fixed-term employees. The committee also stressed the need for a rapid redressal system to file complaints within a stipulated period by the employees in case their dues are not paid off. In order to make sure that the employees get returns for their hard work to the organisation even during the pandemic, gratuity may be computed based on their salary pre covid times. These steps, if implemented, will prove to be helpful to those who lost their jobs before the period of 5 years.
The ongoing legislation and discussion thus make it evident that an employer can forfeit gratuity only after proper compliance with the Payment and Gratuity Act which acts as a welfare statute for the employees who are the pillars of any organisation. The Act stimulates balance between the rights of the employees and the power of the employers. There is a need to expand the ambit of the Act to small organisations where the number of employees is less than ten and to include as many corporations and organisations as possible. To summarize, employers are urged that the law must be rigorously followed as a prerequisite to avoid any disagreement over gratuity forfeiture by employees.