CA Sunil C.Hukkeri
Gratuity is lump sum payment made by an employer to an employee in consideration of his past service when the employment is terminated. It is paid for long and meritorious services rendered by an employee. With enactment of Payment of Gratuity Act, 1972, gratuity payment has become mandatory and in case of non application of gratuity Act, the employee can claim gratuity under terms of contract of employment.
Applicability of Payment of Gratuity Act: – Application depends on two criteria.
1) he should be employed in an establishment to which the act applies and
2) he is an employee as defined in section 2 (e)
Establishments to which the Payment of Gratuity Act applies: – Section 1(3) applies to
1. Employees engaged in factories, mines, oilfields, plantations, ports, railway companies,
2. Every shop or establishment within meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months;
3. Such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.
Central government notification: – Central government by virtue of clause (c) has specified Motor transport undertakings, Clubs, chambers of commerce and industry, Institutions, societies, Trusts and circus industry in which 10 or more persons are employed or were employed on any day of the preceding 12 months, as classes of establishments to which the Act shall apply.
Applicable once, continuous to be governed by PGA 1972:- It is applicable even after the number of persons employed has fallen below ten.
Who is an employee:- According to Section 2 (e), employee means any person employed on wages in establishment as defined under section 1(3) of Payment of Gratuity Act, 1972 to do any skilled, semiskilled, or unskilled, manual or supervisory, technical or clerical work, whether the terms of such employments are express or implied and whether or not such person is employed in managerial or administrative capacity but does not include any such person who holds a post under the central or a state government and is governed by other Act or by any rules providing for payment of gratuity.
Ahmedabad PVT. Primary Teachers Association V Administrative officer, LLJ [(2004) SC]:– held teachers were held to be not an employee under the definition of employee
Now the definition of employee has been widened to include any person, employed to do any kind of work. Thus the definition includes a teacher as an employee under the Act. (The payment of Gratuity (Amendment) Act-2009.
Wage ceiling: – The wage ceiling of Rs 3500/- which was earlier in the Act has been removed. Therefore every employee will become eligible for gratuity irrespective of his wage level.
Time when Gratuity becomes payable: – As per section 4(1) of payment of gratuity Act 1972, gratuity shall be payable to an employee on termination of his employment after he has rendered continuous service of five years or more.
a) On his superannuation, or
b) On his retirement or resignation, or
c) On his death or disablement* due to accident or disease. (for clause C completion of continuous service of five years is not necessary)
* Disablement means such disablement as incapacitates an employee for work which he was capable of performing before accident or disease resulting in such disablement.
Kothari Industrial Corporation V. Appellate Authority
Mere absence from duty without leave cannot be said to result in breach of continuity of service for purpose of this act.
Continuous service: – According to section 2A, for purposes of Act
1. An employee is said to be in continuous service for a period if he has for that period been in uninterrupted service including service which may be interrupted on account of accident, sickness, leave, absence from duty without leave, layoff, strike or a lock-out or cessation of work not due to any fault of employee.
2. Employee other than employee employed in seasonal establishment if he is not in continuous service within meaning of above point (1) for any period of one year or six months, he is deemed to be in continuous service under the employer
3. For said period of one year, if employee during the period of 12 calendar months preceding date with reference to which calculation is to be made, has actually worked under employer for period of at least 190 days in case of employee employed below ground in mine or in an establishment which works less than six days a week and 240 days in other cases.
4. For said period of six months, if employee during the period of six calendar months preceding date with reference to which calculation is to be made, has actually worked under employer should be half the number of days actually worked which constitute continuous service for period of one year i.e. ninety five days and 120 days respectively.
5. Employee of seasonal establishment is not in continuous service within meaning of clause 1 of above for any period of one year or six months, he shall be deemed to be in continuous service under employer for such period if he is actually worked for at least seventy five percent of number of days on which establishment was in operation during such period.
Service is not continuous in case of legal termination of service and subsequent re-employment.
To whom gratuity is payable: – It is payable to
1) Employee :- Normally to employee himself
2) Nomination or heir :- In case of death of employee it is paid to nominee and if no nomination has been made then it is paid to heir
3) Deposited with controlling authority: – where nominee or heir is minor then the amount is deposited with controlling authority who shall invest in bank or other financial institution, as may be prescribed, until such minor attains majority.
Threshold limit of Gratuity: – As per section 4(3) the limit of gratuity has been increased from 3.5 lacs to 10 lacs which will benefit the employees. In Section 10(10) of income tax Act, the gratuity limit also increased from Rs 3.5 lacs to 10 lacs.
However in case any gratuity received by persons covered under the Payment of Gratuity Act, 1972 the gratuity limit has been increased from 10 lacs to 20 Lacs wef 29.03.2018 through notification S.O. 1420 (E) dated 29.03.2018
Forfeiture of gratuity: – forfeiture of gratuity is in two parts.
Section 4 (6)(a) :- that gratuity of any employee whose service has been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, gratuity shall be forfeited to extent of damage or loss caused. Therefore the right of forfeiture is limited to extent of damage.
Section 4 (6) (b):- deals with a case where the services of an employee have been terminated
1. For riotous and disorderly conduct or any other act of violence on his part, or
2. For any act which constitutes an offence involving moral turpitude provided that such offence is committed by him in the course of his employment.
Partial forfeiture of gratuity Vs total forfeiture of gratuity: – In section 4(6) (a) gratuity is limited to extent of damage where as in section 4(6) (b) gratuity may be wholly or partially forfeited.
Bharat gold mines Ltd Vs Regional Commissioner held gratuity stands fully forfeited in terms of section 4(6)(b) where offence of theft committed by employee under law involving moral turpitude.
Therefore, where service has not been terminated on any of the above grounds, the employer cannot withhold gratuity due to the employee.
Travencore Plywood Ind v. Regional JLC Kerala 1996 it was held that gratuity of employee cannot be withheld merely because the land of employer was not vacated by employee. Therefore refusal of an employee to surrender the occupied land belonging to company is not sufficient ground to withhold gratuity under section 4(6) of payment of gratuity Act, 1972.
Air India v. Authority under the Act 1999 CLA 34 held gratuity cannot be withheld for non vacation of service quarters by retiring employees.
Wazir Chand vs. Union of India 2001 held employee after superannuation continued to occupy quarter of company for six months. The company in this case is entitled to charge the rent from him and after adjusting other dues the remaining amount of gratuity may be paid.
Determination of Income tax exemption: – Any gratuity received by an employee, covered by payment of gratuity Act, 1972, is exempt from tax
1. Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees and employees in Local authority shall be exempt.
2. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972shall be exempt subject to following limits:-
3. In case of any other employee, gratuity received shall be exempt, subject to the following exemptions
As per Board’s letter F.No. 194/6/73-IT(A-1) Dated 19.06.73 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1).
Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax subject to provisions mentioned above Circular No. 573 dated 21.08.90).
The ceiling of Rs. 20/10 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.
The above content is general information and is not intended to be advice on any particular matter. Reader should seek appropriate professional advice before acting on basis of above information.
(Republished With Amendments)