Payment of Gratuity Act, 1972 - Nangia & Co

Payment of Gratuity Act, 1972Nangia & Co.Chartered AccountantsContinuous ServiceAn employee shall be said to be in continuousservice for a period if he has, for that period been inun-interrupted service, including service which maybe interrupted on account of sickness, accident,leave, absence for duty without leave (not beingabsence in respect of which an order treating theabsence as break in service has been passed inaccordance with the standing orders, rules orregulations governing the employees of theestablishment), layoff, strike or a lock-out orcessation of work not due to any fault of theemployee, whether such uninterrupted orinterrupted service was rendered before or after thecommencement of the Gratuity Act.Deemed Continuous ServiceWhere an employee (not being an employeeemployed in a seasonal establishment) is not incontinuous service within the meaning of clause (1),for any period of one year or six months, he shall bedeemed to be in continuous service under theemployer –(a) for the said period of one year, if the employeeduring the period of twelve calendar monthspreceding the date with reference to whichcalculation is to be made, has actually worked underthe employer for not less than - One hundred and ninety days, in the case ofan employee employed below the ground ina mine or in an establishment which worksfor less than six days in a week; and Two hundred and forty days, in any othercase;(b) for the said period of six months, if the employeeduring the period of six calendar months precedingthe date with reference to which the calculation is tobe made, has actually worked under the employerfor not less than – ninety-five days, in the case of an employeeemployed below the ground in a mine or inan establishment which works for less thansix days in a week; and One hundred and twenty days, in any othercase.Amount of Gratuity Payable - Method ofCalculationThe provisions relating to Gratuity lays down that forevery completed year service or part thereof inexcess of six months, the employer shall pay gratuityto an employee at the rate of fifteen days’ wagesbased on the rate of wages paid for any overtimeand shall not be taken into account. In seasonalestablishments the employees stand classified intotwo groups:- Those who work throughout the year and Those who work only during the season.The former are entitled to gratuity at the rate of 15day’s wages for every completed year of service orpart thereof in excess of six months. The latter(those who work only during the season) are,however, entitled to receive gratuity at the rate ofseven days for each season. In the case of a monthlyrated employee, the fifteen days wages shall becalculated by dividing the monthly rate of wages lastdrawn him by twenty-six and multiplying thequotient by fifteen.Maximum Limit on GratuityThe maximum amount of gratuity payable to anemployee shall not exceed Rs. 350,000/-. Anemployee due to any accident or disease maybecome disabled with result he cannot do the samework with the same efficiency. The employer may reemploysuch employee only on reduced wages. Thegratuity of these disabled workmen will becomputed in two parts: For the period preceding the disablementgratuity is calculated on the basis of wageslast drawn by him at the time of thetermination of his service. For the period subsequent to thedisablement gratuity will be computed onthe basis of the reduced wages as drawn byhim at the time of the termination of hisservice.2 | Payment of Gratuity Act, 1972

Payment of Gratuity Act, 1972Nangia & Co.Chartered Accountantsinterest payable shall in no case exceed the amountof the gratuity payable under the Act.PenaltiesThe following are the penalties provided under theAct:- If the employer knowingly makes falsestatement / representation to avoid payment: -Imprisonment up to 6 months, or with finewhich may extend to Rs.10,000/- or with both.based on salary drawn for each year ofservice 2 (i.e. 15days salary x length ofservice) ; Actual amount of Gratuity Received; Rs. 350,000/-.3. Employees not covered by the Payment ofGratuity Act, 1972:- Any gratuity received by anemployee, not covered by the Payment ofGratuity Act, 1972, the least of the below threeis exempt from tax : If the employer breach or makes default incomplying with any of the provisions of thisAct:- Imprisonment for 3 months to 1 year, orwith fine which shall not be less thanRs.10,000/- but which may extend toRs.20,000/- or with both. Non-payment of any gratuity: - Imprisonment 6months to 2 years and a fine. Half Month’s average salary 3 for eachcompleted year of service 4 ; Actual amount of Gratuity Received; Rs. 350,000/-.****Provisions relating to Income Tax Act, 1961If Gratuity is received by an employee himself, it istaxable under “Income from Salary” but if it isreceived by a legal heir of an employee on his death,it is taxable under "Income from Other Sources”. TheIncome Tax Act, 1961 provides exemption of certainamount from death-cum -retirement gratuity u/s10(10). The basic rule of exemption in case death -cum retirement gratuity is as under:-1. Government Employee:- Fully exempt from taxunder section 10(10)(i).2. Employees covered by the Payment of GratuityAct, 1972:- Any gratuity received by anemployee, covered by the Payment of GratuityAct, 1972, the least of the below three is exemptfrom tax : 15 day’s salary 1 (7 day’s salary in case ofemployees of a seasonal establishment)1 Meaning of Salary: - Salary for the purpose of theaforesaid limits means salary last drawn by theemployee and includes dearness allowance but doesnot include any bonus, commission, house rentallowance, overtime wages and any other allowance.2 Length of Service: - If the period of service is 6months or less than 6 months, it shall be ignored forthis purpose. Conversely if the period of the serviceis more than 6 months, it shall be taken as full oneyear.3 Meaning of Average Monthly Salary: - Averagesalary means the average of the salary drawn by theemployee for 10 months immediately preceding themonth in which he retires.4 Length of Service: - For calculating length of serviceany fraction of the year shall be ignored.4 | Payment of Gratuity Act, 1972