Compliance with Payment of Wages (Payment of Gratuity) Act in Bangalore

Compliance with Payment of Wages (Payment of Gratuity) Act in Bangalore

Payment of Gratuity Act 1972 is an Indian law that regulates the payment of gratuity to employees in India. The Act ensures financial security to employees who have completed a minimum service period in an organisations. It applies to factories, mines, oilfields, plantations, ports, railways, and other establishments with over ten employees.

What is Gratuity?

A gratuity is a form of financial compensation given to employees by an organisations to express their gratitude for the work done. It is a form of acknowledgement of their efforts and contributions to the company’s growth and development. The amount is usually calculated based on the employee’s service tenure and last drawn salary.

Gratuity is usually given to employees who have worked for the company for five years minimum. It serves as a morale booster for employees, recognizing their hard work and dedication towards the company. 
  

What Is the Payment of Gratuity Act 1972?

Payment of Gratuity Act 1972 is a type of legislation in India that falls under labour laws. Companies must pay a one-time gratuity to retired employees or those who resign after at least five years of service. The law applies to all companies in India with at least ten workers.

The Act provides a lump sum payment to the employee or their nominee in case of death or disability. The amount payable is calculated based on 15 days' salary for each completed year of service.

Payment of Gratuity Act provides for the appointment of controlling authorities to settle disputes between employers and employees regarding gratuity payments. Employers must obtain insurance coverage for their gratuity liabilities, and failure to comply with the Act can result in penalties and legal action.

Who is Liable to Pay Gratuity?

Companies with a workforce of at least ten individuals must offer gratuity as per the Payment of Gratuity Act 1972. This applies to private and government organisations.

Gratuity Act 1972 Eligibility

To qualify for gratuity as per the Act, an employee must have completed at least five years of continuous service in the same establishment, including seasonal or interrupted service.

But this excludes periods of absence due to sickness, accident, or leave without pay. The Act also provides for the payment of gratuity in case of death or disablement due to accident or disease.

What are the Clauses for Nomination?

The Gratuity Act 1972 allows an employee to designate a person- a nominee to receive the gratuity amount in case of their death. There are certain clauses for nomination under this Act.

1. An employee can nominate one or more family members. If they have no family, they can choose anyone else as their nominee. 
2. The employee can make the nomination at any point during their tenure, and they also have the option to modify it before they pass away. 
3. Any change in the nomination made by the employee should be in writing and submitted to the employer. 
4. If the nominee is a minor, the employee can appoint a guardian to receive the gratuity on their behalf.
  

When is Gratuity Paid?

Gratuity is paid at these times.

●    Retirement: Gratuity is typically paid at the time of retirement of an employee as a token of appreciation for their long-term service.
●    Resignation: Employees who resign after completing a minimum of five years of service are eligible for gratuity.
●    Death or disability: If an employee is terminated due to a disability or death, the employer must pay the gratuity amount to their nominee or legal heir.
  

How is Gratuity Calculated?

Gratuity is calculated on three main factors - the employee’s last drawn salary, the duration of the service with the organisations, and the rate of gratuity specified by the employer.

The formula for calculating gratuity is as follows.

Gratuity = (Last drawn salary x Number of years of service x 15)/26  

Here, 15 represents the number of days of salary (also called the gratuity rate) for every completed year of service, and 26 represents the number of working days in a month. The formula assumes that an employee works 26 days a month, and the gratuity calculation is based on the number of completed years of service.

For example, if an employee has worked with an organisations for 10 years and their last drawn salary was Rs. 90,000 per month, the gratuity calculation would be as follows:

Gratuity = (90,000 x 10 x 15) / 26 
               = 5,19,230/-
In this example, the employee is entitled to receive a gratuity payment of Rs. 5,19,230/- from their employer.

It is important to note that the maximum gratuity payable under the Payment of Gratuity Act 1972 is Rs. 20 lakhs. 

The gratuity rate can vary from one organisations to another, and employers are required to specify this rate in their employment contracts.

For instance, if an employer has specified a gratuity rate of 20% of an employee's last drawn salary, the calculation of gratuity for an employee with 6 years of service and a last drawn salary of Rs. 75,000 per month would be as follows:

Gratuity = (75,000 x 6 x 20)/26
                = 3,46,153/-

In this example, the employee is entitled to receive a gratuity payment of Rs. 3,46,153 from their employer, as per the specified gratuity rate of 20%.

What are the Income Tax Implications on Gratuity?

Scenario

Income Tax Implications

Gratuity received by Government employees

Fully exempt from income tax

Gratuity received by employees covered under the Payment of Gratuity Act, 1972

Exempt up to a certain limit; the maximum limit for exemption is Rs. 20 lakhs as of FY 2022-23. Any amount received above this limit is taxable as per the employee's income tax slab.

Gratuity received by employees not covered under the Payment of Gratuity Act, 1972

Exempt up to a certain limit; the maximum limit for exemption is Rs. 10 lakhs as of FY 2022-23. Any amount received above this limit is taxable as per the employee's income tax slab.

Gratuity received by an employee in case of their death

Fully exempt from income tax

Gratuity received by an employee in case of a disability

Fully exempt from income tax

 

What are the Conditions for Termination of Gratuity?

Here are some conditions for termination of gratuity.

●    Termination due to misconduct:
 If an employee is terminated from their job due to any misconduct, such as theft, fraud, or harassment, they may not be eligible for gratuity.

●    Resignation before completing 5 years of service:
 To qualify for gratuity, an employee must have worked continuously for at least f five years with their current employer. If an employee resigns before completing five years of service, they may not be eligible for gratuity.

●    Termination due to disability or death:
 If an employee is terminated due to a disability or death, their nominee or legal heir will be entitled to the gratuity amount.

●    Contractual employee: Contractual employees are generally not considered permanent employees and may not be entitled to receive gratuity. Suppose a contractual employee completes a minimum of five years of continuous service. In that case, the contractual agreement between the employee and employer must be reviewed to determine whether the contractor or the company is responsible for paying the gratuity.


Created & Posted by Aashutosh Choudhary
Article Assistant at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

Watch all the Informational Videos here: YouTube Channel

TAXAJ Corporate Services LLP
186/A, 1st Floor, 22nd Cross, 3rd Sector, Near HSR Club, HSR Layout, Bangalore- 560102
Contact: 8961228919 ; 8802812345 | E-Mail: connect@taxaj.com

    • Related Articles

    • Income Tax Exemption on Gratuity

      Gratuity is a benefit given by the employer to employees. A recently approved amendment by the Centre has increased the maximum limit of gratuity. Now it is tax-exempt up to Rs 20 lakh from the previous ceiling of Rs 10 lakh, which comes Section ...

    • Compliance with Income Tax Act in India

      Compliance with Income Tax Act in India Compliance with the Income Tax Act in India involves adhering to various provisions, rules, and regulations related to income tax payments, deductions, filing of tax returns, and maintaining proper records. ...

    • Tax Compliance for Educational Institutions in Bangalore

      Educational institutions play a vital role in shaping the future, but behind the scenes, they must navigate a complex landscape of tax regulations to ensure smooth operations. In Bangalore, India, these institutions are subject to various tax ...

    • Partnership Firm Taxation in Bangalore

      Taxation for partnership firms in Bangalore, India is governed primarily by the Income Tax Act, 1961 as well as any local or state-specific tax laws. Here's a breakdown of key aspects of taxation for partnership firms in Bangalore: Income Tax Rate: ...

    • How To Pay Advance Tax Payment Online?

      As per the nature of taxes, you earn your income first and then pay taxes. However, in case of advance taxes, you pay your estimated tax liability before the end of a financial year. That said, you are eligible to pay advance tax only if you receive ...