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Provision and Payment of Gratuity is Mandatory


CA Sitaram Agrawal 
posted on 08 May 2009



This Act is enacted to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto.

 
APPLICABILITY OF THIS ACT:
It extends to the whole of India, Provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu and Kashmir.
The provisions of this Act, shall apply to­ -
(a)           every factory, mine, oilfield, plantation, port and railway company;
(b)           every shop or establishment within the 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;
(c)           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.
NOTE:
A shop or establishment to which this Act has become applicable shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten. Now let us understand some of the important definitions of this Act:
(a) "completed year of service" means continuous service for one year;
(b) "employee" means any person (other than an apprentice) employed on wages, in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied, [and whether or not such person is employed in a managerial or administrative capacity, but does not include any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity].
(c) "employer" means, in relation to any establishment, factory, mine, oilfield, plantation, port, railway company or shop -
(i) belonging to, or under the control of, the Central Government or a State Government, a person or authority appointed by the appropriate Government for the supervision and control of employees, or where no person or authority has been so appointed, the head of the Ministry or the Department concerned,
(ii) belonging to, or under the control of, any local authority, the person appointed by such authority for the supervision and control of employees or where no person has been so appointed, the chief executive office of the local authority,
(iii) in any other case, the person, who, or the authority which, has the ultimate control over the affairs of the establishment, factory, mine, oilfield, plantation, port, railway company or shop, and where the said affairs are entrusted to any other person, whether called a manager, managing director or by any other name, such person;
(d) "family", in relation to an employee, shall be deemed to consist of -
(i) in the case of a male employee, himself, his wife, his children, whether married or unmarried, his dependent parents and the dependent parents of his wife and the widow and children of his predeceased son, if any,
(ii) in the case of a female employee, herself, her husband, her children, whether married or unmarried, her dependent parents and the dependent parents of her husband and the widow and children of her predeceased son, if any:

Explanation: Where the personal law of an employee permits the adoption by him of a child, any child lawfully adopted by him shall be deemed to be included in his family, and where a child of an employee has been adopted by another person and such adoption is, under the personal law of the person making such adoption, lawful, such child shall be deemed to be excluded from the family of the employee;
(e) "retirement" means termination of the service of an employee otherwise than on superannuation;
(f) "superannuation", in relation to an employee, means the attainment by the employee of such age as is fixed in the contract or conditions of service at the age on the attainment of which the employee shall vacate the employment;
(g) "wages" means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.
(h) “Continuous service” For the purposes of this Act, -
(1) an employee shall be 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 sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order treating the absence as break in service has been passed in accordance with the standing order, rules or regulations governing the employees of the establishment), lay off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act.
(2) where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer -
(a) for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than -
(i) one hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case;
(b) for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than -
(i) ninety-five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) one hundred and twenty days, in any other case;
Explanation: For the purpose of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which -
(i)                   he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946
(ii)                 he has been on leave with full wages, earned in the previous year;
(iii)                he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment and
(iv)                in the case of a female, she has been on maternity leave; so, however, that the  total period of such maternity leave does not exceed twelve weeks.
(3) where an employee employed in a seasonal establishment, is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for such period if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during such period.
 
PAYMENT OF GRATUITY
(1)           Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Where the termination of the employment of any employee is due to death or disablement the completion of continuous service of five years shall not be necessary.
In the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.
Explanation. : “Disablement” means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement.
(2)           For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days wages based on the rate of wages last drawn by the employee concerned:
In the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account.:
In the case of an employee who is employed in a seasonal establishment and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days wages for each season.
Explanation: In the case of a monthly rated employee, the fifteen days wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.
(3)           The amount of gratuity payable to an employee shall not exceed three lakhs and fifty thousand rupees.
(4)           For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.
(5)           Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.
(6)           Notwithstanding anything contained in sub-section (1), -
(a) 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.
(b) the gratuity payable to an employee may be wholly or partially forfeited -
(i) 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
(ii) If the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.
 
COMPULSORY INSURANCE
(1) Every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India or any other prescribed insurer
(2) The appropriate Government may, exempt every employer who had already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed from the provisions of sub-section (1).
(3) Every employer shall within such time as may be prescribed get his establishment registered with the controlling authority in the prescribed manner and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2).
(4) Where an employer fails to make any payment by way of premium to the insurance referred to in sub-section (1) or by way of 'contribution to all approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Act (including interest, if any, for delayed payments) forthwith to the controlling authority.
(5) Whoever contravenes the provisions of sub-section (5) shall be punishable with fine which may extend to ten thousand rupees and in the case of a continuing offence with a further fine which may extend to one thousand rupees for each day during which the offence continues.
 
NOMINATION
(1) Each employee, who has completed one year of service, shall make, within such time, in such form and in such manner, as may be prescribed, nomination.
(2) An employee may, in his nomination, distribute the amount of gratuity payable to him under this Act amongst more than one nominee.
(3) If an employee has a family at the time of' making a nomination, the nomination shall be made in favour of one or more members of his family, and any nomination made by such employee in favour of a person who is not a member of his family, shall be void.
(4) If at the time of making a nomination the employee has no family, the nomination may be made in favour of any person or persons but if the employee subsequently acquires a family, such nomination shall forthwith become invalid and the employee shall make, within such time as may be prescribed, afresh nomination in favour of one or more members of his family.
(5) A nomination may, subject to the provisions of sub-sections (3) and (4), be modified by an employee at any time, after giving to his employer a written notice in such form and in such manner as may be prescribed, of his intention to do so.
(6) If a nominee predeceases the employee, the interest of the nominee shall revert to the employee who shall make a fresh nomination, in the prescribed form, in respect of such interest.
(7) Every nomination, fresh nomination or alteration of nomination, as the case may be, shall be sent by the employee to his employer, who shall keep the same in his safe custody.
 
DETERMINATION OF THE AMOUNT OF GRATUITY
(1) A person who is eligible for payment of gratuity under this Act or any person authorized, in writing, to act on his behalf shall send a written application to the employer, within such time and in such form, as may be prescribed, for payment of such gratuity.
(2) As soon as gratuity becomes payable, the employer shall, whether an application referred to in sub-section (1) has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the controlling authority specifying the amount gratuity so determined.
(3) The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
(3A) If the amount of gratuity payable under sub-section (3) is not paid by the employer within the period specified in sub-section (3), the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits.
But no such interest shall be payable if the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the controlling authority for the delayed payment on this ground.
 
PENALTIES
(1) Whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other person to avoid such payment, knowingly makes or causes to be made any false statement or false representation shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees or with both.
(2) An employer who contravenes, or makes default in complying with, any of the provisions of this Act or any rule or order made there under shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to one year, or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both:
In case where the offence relates to non-payment of any gratuity payable under this Act, the employer shall be punishable with imprisonment for a term which shall not be less than [6] [Six months but which may extend to two years] unless the court trying the offence, for reasons to be recorded by it in writing, is of opinion that a lesser term of imprisonment or the imposition of a fine would meet the ends of justice.
 
TAX UPON GRATUITY
Gratuity can be received by the employee at the time of his retirement or by his legal heir in the event of death of the employee. Gratuity received by an employee on his retirement is taxable under the head "Salary" and gratuity received by the legal heir is taxable under the head" Income from Other Sources".

In both the above situations gratuity upto a specified limit is exempt under the provisions of sec.10 (10) of the Income Tax Act, 1961.

For the purpose of exemption of gratuity under Section 10(10) the employees are divided under three categories:
1.             Govt. employees - In the case of govt. employees the entire amount of death-cum-retirement gratuity is exempt from tax and nothing is therefore taxable under the head Salaries.
2.             Employees covered under the Payment of Gratuity Act, 1972 - For employees covered under the Gratuity Act, total of gratuity received by an employee,  covered by the Gratuity Act, from various employers in whole of service is exempt  from tax to the extent of least of the following three amounts:
(a) 15 days' salary (7 days in the case of seasonal employment), based on the last drawn salary, for each completed year of service provided the employment is more than six months; or
(b)Rs. 3,50,000/-; or
(c)The gratuity actually received.
Gratuity received in excess of the minimum of the amounts mentioned above is included in the gross salary for the purposes of taxation.
3.             Other employees - For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts
(a) Half month's average salary for every completed year of service. (Average salary means the average of the salary drawn by the employee for 10 months immediately preceding the month in which he retires); or
(b) Rs. 3,50,000/-; or
(c) Actual amount of gratuity received.
The amount received in excess of the sums mentioned above is included in the gross salary of the employee for the purposes of taxation.
Under Section 89(1), a relief can be claimed if gratuity is received in excess of the above mentioned limits. [Rule 21A(3)]
 
SECTION 40A(7):
No deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
Explanation: For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.
 
GRATUITY & ACCOUNTING STANDARD 15:
Accounting Standard (AS) 15, Employee Benefits(revised 2005), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after April 1, 2006 and is mandatory in nature from that date:
(a) in its entirety, for the enterprises which fall in any one or more of the following categories, at any time during the accounting period:
(i) Enterprises whose equity or debt securities are listed whether in India or outside India.
(ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard.
(iii) Banks including co-operative banks
(iv) Financial institutions
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore Turnover does not include ‘other income’.
(vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
(b) in its entirety, except the following, for enterprises which do not fall in any of the categories in (a) above and whose average number of persons employed during the year is 50 or more.
(i) paragraphs 46 and 139 of the Standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date; and
(ii) recognition and measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting for defined benefit plans. However, such enterprises should actuarially determine and provide for the accrued liability in respect of defined benefit plans as follows:
a.        The method used for actuarial valuation should be the Projected Unit Credit Method.
b.       The discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.
c.        Such enterprises should disclose actuarial assumptions as per paragraph 120(l) of the Standard.
(c) in its entirety, except the following, for enterprises which do not fall in any of the categories in (a) above and whose average number of persons employed during the year is less than 50.
(i) paragraphs 46 and 139 of the Standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date;
(ii) recognition and measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting for defined benefit plans. Such enterprises may calculate and account for the accrued liability under the defined benefit plans by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year.
 
NOTE: Gratuity is covered under Post-Employment Benefits as per AS-15. For detailed provisions please refer AS-15 EMPLOYEE BENEFITS.

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