Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company.
Gratuity is given by the employer to his/her employee for the services rendered by him during the period of employment. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met.
A person is eligible to receive gratuity only if he has completed minimum five years of service with an organization. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to accident or disease.
There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to get – an employer can use a formula-based approach or even pay higher than that. Gratuity payable depends on two factors: Last drawn salary and years of service. To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:
(a) Employees covered under the Act
(b) Employees not covered under the Act
An employee will be covered under the Act if the organization employees at least 10 persons on a single day in a preceding 12 months. And once an organization comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees is falls below 10.
Let us understand more about the eligibility, payment option and more on Gratuity Act in India.
An individual who has completed 5 years of continuous service in an organization is eligible for gratuity benefit. However, this is not applicable in the case where the employment is terminated due to death or any disability. The amount will be paid to the nominee or legal heir. An employee could leave his job for various reasons, after which receiving his gratuity.
Calculation depends on whether an employee is covered under the payment of Gratuity Act, 1972 or it is a voluntary step on the part of a company etc. If an employee is covered under the Act, then he is entitled to a gratuity amount of 15 days salary or wages, multiplied by the number of years he has put in. Then in that case your calculation would be as follows:
Gratuity = Last drawn basic salary x 15/26 x No. of years of
When gratuity is received by the employee within the duration of his service then gratuity is taxable and falls under the head of “salaries”. But when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private employees to government employees.
The gratuity amount is payable at the time of:
- On Superannuation or retirement
- On resignation
- On termination
- On death
- Disablement due to accident or disease
- On retrenchment
- On layoff
- Voluntary Retirement Scheme
The maternity benefit Act
The maternity benefit Act 1961 protects the employment of women during the time of her maternity and entitles her of a ‘maternity benefit’ – i.e. full paid absence from work – to take care for her child. The act is applicable to all establishments employing 10 or more persons. The amendments will help 3 million (approx.) women workforce in organized sector in India.
The Maternity Benefit Act, 1961 (MB Act) was amended by the Maternity Benefit (Amendment) Act, 2016 (MB Amendment Act) which became effective on April 1st, 2017 (except for the provision that required a crèche facility to be provided by the employer, which came into effect on July 1st, 2017).
Applicability of the Act
- Every factory, mine or plantation (including those belonging to Government),
- An establishment engaged in the exhibition of equestrian, acrobatic and other performances, irrespective of the number of employees, and
- Every shop or establishment wherein 10 or more persons are employed or were employed on any day of the preceding 12 months.
Amendment payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons. The main purpose for enacting this Act is to provide social security to workman after retirement, whether retirement is a result of superannuation, or physical disablement or impairment of vital part of the body. Therefore, the Payment of Gratuity Act, 1972 is an important social security legislation to wage earning population in industries, factories and establishments.
The present upper ceiling on gratuity amount under the Act is Rs. 10 Lakh. The provisions for Central Government employees under Central Civil Services (Pension) Rules, 1972 with regard to gratuity are also similar. Before implementation of 7th Central Pay Commission, the ceiling under CCS (Pension) Rules, 1972 was Rs. 10 Lakh. However, with implementation of 7th Central Pay Commission, in case of Government servants, the ceiling has been raised toRs. 20 Lakhs.
Therefore, considering the inflation and wage increase even in case of employees engaged in private sector, this Government decided that the entitlement of gratuity should also be revised in respect of employees who are covered under the Payment of Gratuity Act, 1972. Accordingly, the Government initiated the process for amendment to Payment of Gratuity Act, 1972 to increase the maximum limit of gratuity to such amount as may be notified by the Central Government from time to time. Now, the Government has issued the notification specifying the maximum limit to Rs. 20 Lakh.
In addition, the Bill also envisages to amend the provisions relating to calculation of continuous service for the purpose of gratuity in case of female employees who are on maternity leave from ‘twelve weeks’ to ‘such period as may be notified by the Central Government from time to time’. This period has also been notified as twenty six weeks.
Impact: The Bill as passed by both the Houses of Parliament, andassented to by the Hon’ble President and notified by the Government. This will ensure harmony amongst employees in the private sector and in Public Sector Undertakings/ Autonomous Organizations under Government who are not covered under CCS (Pension) Rules. These employees will be entitled to receive higher amount of gratuity at par with their counterparts in Government sector.
The amendments to Maternity Benefit Act, 1961 are as follows:
- Increase Maternity Benefit from 12 weeks to 26 weeks for two surviving children and 12 weeks for more than two children.
- 12 weeks Maternity Benefit to a ‘Commissioning mother’ and ‘ Adopting mother’.
- Facilitate ‘Work from home’.
- Mandatory provision of Creche in respect of establishment having 50 or more employees.
- Maternal care to the Child during early childhood – crucial for growth and development of the child.
- The 44th, 45th and 46th Indian Labour Conference recommended enhancement of Maternity Benefits to 24 weeks.
- Ministry of Women & Child Development proposed to enhance Maternity Benefit to 8 months.
- In Tripartite consultations, all stake holders, in general supported the amendment proposal.