This article basically will help to understand the overview of the applicability of the Payments of Gratuity Act 1972.
What is Gratuity?
Gratuity is a benefit that is payable under the Payment of Gratuity Act 1972. Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. But, gratuity is paid only to employees who complete five or more years with the company.
What is Gratuity in Salary?
Gratuity is a financial component offered by an employer to an employee in recognition of his/her service rendered to an organisation. It is a part of the salary an employee receives and can be viewed as a benefit plan designed to aid an individual in his/her retirement.
Gratuity is paid by an employer when an employee leaves the job after serving the same organisation for a minimum period of 5 years. One can consider it to be a financial “Thank you” to an employee for rendering continuous service to an employer.
Applicability :
Gratuity is applicable to every establishment (except Government establishments) wherein 10 or more employees have been employed in any day of the preceding twelve months. Once it is applicable, even if the number of employees falls below 10 afterwards, the Company shall be governed by this Act.
Calculation of Gratuity:
Gratuity is calculated as No of Years of Service * Last basic Pay +Dearness Allowance *15/26
Gratuity to be paid by employer = N*B*15/26
The monthly rate of gratuity is calculated as follows:
15/26/12 * 100
Rate of Gratuity = 15/26 /12*100
= 0.576/12*100
= 4.81%
Gratuity is to be paid to employee on termination of his employment after he has rendered continuous service for not less than 5 years either on the following:-
- On his superannuation or
- On his retirement or resignation or
- On his death or disablement due to accident or disease;
Provided that the completion of his service shall not be applicable where termination of his service is due to death or disablement
Provided also that if an employee leaves the organization before 5 years but has completed 210 days of service in the 5th year, the employee is to receive the gratuity as per the Act.
Maximum amount of gratuity
The maximum amount of gratuity payable by an employer shall not be more than 10 lacs, however any additional amount paid by the employer will be treated as a Bonus.
Steps to form a Gratuity Trust:
- Pass a BR for forming a Trust
- Prepare a List of trustees
- Preparation of Trust Deed
- Draft a letter to the Commissioner of Income Tax for approval of Gratuity Trust
- Apply for Pan Card
- Open a savings bank account in any nationalized bank/schedule bank in favour of the Trust
- Get Gratuity Insurance from LIC
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A good article. Thanks for the same.