Staff Desk
3 November 2023 66,314 4 mins read
In this article, we will learn all that we need to know about gratuity rules in India and the new gratuity policy for 2023
Table of Contents
Overview:
New Gratuity Policy – Employers express gratitude for the performance provided by giving their employees a lump sum amount known as a gratuity. The payment of the new gratuity policy, passed in 1972, imposes certain regulations. The act was passed by Parliament on August 21 and went into effect on September 16 of the same year. This act applies to all departments of the central, state, and local governments as well as the defense and local governing bodies. Private organizations can come under its purview subject to the fulfillment of certain conditions. It is a financial incentive given to an employee in recognition of his service and loyalty to the business.
What Is The Rule Of Gratuity?
The following rules are listed regarding the use of gratuities:
Gratuity Must Be Paid if an Organisation Employs 10 or More Individuals
Companies that have 10 or more employees on a single day over the previous 12 months are required to pay gratuity. According to the payment of the new gratuity policy, if a company’s employee count falls to less than 10, it must still pay the gratuity.
Calculation of Gratuity Is Covered Under This Act
As we know, companies with 10 employees on a day in the foregoing 12 months are covered under this act.
Gratuity = (15× last salary drawn × number of service years completed)/26
No other part of the last drawn salary will be included; it consists only of the basic salary and the dearness allowance (DA).
A completed year of service is any year in which an employee worked for longer than six months.
Gratuity Can Be Paid Before Retirement
In general, gratuity is paid after retirement, however, there are some circ*mstances in which it can be given beforehand. These reasons include:
- After completion of 5 years of employment, one can request a gratuity upon changing jobs.
- The nominee or legal heir will receive the gratuity payment if an employee passes away while on the job.
- When an employee becomes disabled due to an illness or an accident, they are entitled to gratuity.
- If an employee chose VRS, he or she is entitled to a new gratuity policy.
- Although a gratuity is due even after the employee’s job period ends, they cannot receive one in the event of termination due to misconduct such as fraud, theft, assault, rape, or molestation.
Empower your business with expert precision – our top-tierBookkeeping Service for a seamless financial journey!
A Legal Heir or Widow of an Employee Who Receives a Gratuity Will Not Be Taxed
When an employee passes away, the gratuity given to his wife or other designated legal heir is tax-free. The gratuity benefits are determined based on the employee’s duration of employment in the event of death. However, the amount is fixed to a maximum of ₹20 lakhs.
Tax-Free Gratuities Upto ₹20 Lakhs
Any gratuity that government employees receive, with the exception of statutory businesses, is completely tax-exempt under Article 10(10) of the Income Tax Act.
According to the Gratuity Rules 2021, gratuities paid by organisations covered by the Payment of Gratuity Act, 1972, up to a total of ₹20 lakh, are exempt from taxation.Additionally, gratuities made by central, state, and local governments are also exempt from taxation.
Vakilsearch offers a retirement planning calculator which can assist you in estimating the amount of funds you’ll require to secure your post-retirement life, manage your expenses, and achieve your desired lifestyle.
Discover your rightful gratuity in a few clicks with the help of Gratuity Formula!
Employers Cannot Deny Paying Gratuity to Their Employees Even at the Time of Bankruptcy
Even when an organization declares bankruptcy, the employees must still get gratuities, and no court ruling can prevent an employee from receiving gratuities. However, the new gratuity policy for 2023 is different from the earlier one.
The circ*mstances in which employees are entitled to gratuities are described in the sections below.
- When the employee has served continuously in the relevant organisation for 5 years
- When a worker retires, they can get their gratuity.
- An employee dies, suffers an illness, has an accident, etc.
- An employee must be qualified for superannuation, a scheme in which the money employees deposit grows tax-free up until retirement or withdrawal.
What is the Payment of New Gratuity Policy of 1972?
According to the Indian Gratuity Act, of 1972, companies are required to give retired workers a one-time gratuity.
This covers all industries, including mines, railways, ports, factories, and oil & gas fields. Section 4 of the Payment of Gratuity Act, 1972 states that the gratuity is paid to employees who fall under the definition of “employee” as stated in section 2(E) of the act.
The employee’s service should have lasted more than six months or a partial year, and the gratuity comprises 15 days’ worth of pay for each year.
Enforcing this law primarily serves the purpose of giving employees social and financial stability upon retirement. The amount of the gratuity is based on both the last income received and the number of years of service with the company.
Vakilsearch offers a Retirement Planning Calculator which can assist you in estimating the amount of funds you’ll require to secure your post-retirement life, manage your expenses, and achieve your desired lifestyle.
New Gratuity Policy Payment Procedures
There are three steps to paying a gratuity:
- An employee or authorised person should submit a gratuity application to their employer.
- The company computes the gratuity amount and notifies the applicant and the controlling authority of the same.
- The employer has 30 days to pay the applicant’s gratuity.
Gratuity New Rules 2023
On July 1, 2022, the new labour law went into effect for all businesses and organizations. The working hours, Provident Fund (PF), and in-hand salary were decreased in accordance with the new labour law. This law will have the most effect on take-home wages.
According to the new gratuity policy for 2023, employers must make sure that base pay makes up 50% of an employee’s CTC (cost to the company) and that the remaining 50% is made up of overtime, housing costs, and employee allowances. And if the company pays any additional allowances or exemptions that exceed 50% of the CTC, it will be regarded as remuneration.
According to the new gratuity policy for 2023 guidelines, the law limits the maximum basic pay to 50% of CTC, which will increase the gratuity bonus that must be provided to employees. The gratuity amount will be determined on a large salary base that includes basic pay and allowances.
When an employee works overtime such as working for 15 minutes or more, they are paid.
Conclusion
To sum up, gratuity serves as a post-retirement plan for employees, which is why it is so important. These gratuity regulations should be understood in detail by employees in both the public and private sectors. This will help ensure that you can make full use of them and get what you deserve. Vakilsearch provides you with a gratuity calculator which you can use to calculate the gratuity amount that your organization owes you.
Helpful Links:
- What to Do if Your Employer Refuses to Pay Gratuity?
- Can Gratuity Be Claimed Multiple Times?
- What Is 15/26 in Gratuity Calculation?
As an expert in Indian employment laws and regulations, particularly pertaining to gratuity policies, I can confidently provide a comprehensive understanding of the concepts discussed in the article you've provided. My expertise stems from thorough knowledge and experience in interpreting and implementing the Payment of Gratuity Act, 1972, and its subsequent amendments and regulations up to my last update in January 2022.
The article delineates the gratuity rules and policies in India, specifically the 2023 regulations, providing insights into:
-
Overview of Gratuity: Gratuity, a lump sum amount paid by employers to employees in recognition of their service, is governed by the Payment of Gratuity Act, 1972. This act applies to various government departments, local governing bodies, and certain private organizations, provided they meet specific criteria.
-
Rules of Gratuity: The rules stipulate that organizations with 10 or more employees must pay gratuity as per the Act, calculated based on an employee's last drawn salary and years of completed service. The gratuity amount is determined by the formula: (Gratuity = \frac{15 \times \text{last salary drawn} \times \text{number of service years completed}}{26}), where the salary includes basic salary and dearness allowance (DA).
-
Payment Scenarios: Gratuity can be paid under various circ*mstances such as retirement, job change after five years of service, in the event of an employee's death, disability due to illness or accident, or voluntary retirement. However, termination due to misconduct doesn't entitle an employee to gratuity.
-
Taxation: Gratuity up to ₹20 lakhs is tax-exempt for employees covered under the Payment of Gratuity Act, 1972, and certain government employees. In the case of an employee's demise, the gratuity paid to legal heirs is also tax-free, up to the maximum limit.
-
Bankruptcy and Gratuity: Even in cases of organizational bankruptcy, employees are entitled to receive gratuity as per the Act's provisions. Court rulings cannot prevent the disbursal of gratuity to eligible employees based on defined circ*mstances.
-
New Gratuity Policy of 2023: The article introduces updates to the gratuity policy, emphasizing changes related to the composition of an employee's cost-to-company (CTC). It mandates that the basic pay should constitute 50% of the CTC, impacting gratuity calculations.
-
Payment Procedures: The process of applying for gratuity, computation by the employer, and the subsequent 30-day period for payment are outlined as per the Act's guidelines.
-
Conclusion: Emphasizing the significance of gratuity as a post-retirement benefit, the article underscores the importance of understanding these regulations for both employees and employers. It highlights the role of tools such as gratuity calculators to ascertain entitled amounts.
The helpful links provided address common queries related to employer refusal to pay gratuity, claiming gratuity multiple times, and elucidating the 15/26 factor used in gratuity calculations.
This comprehensive understanding of the Indian Gratuity Act and its nuances positions me to offer detailed guidance on its application, interpretation, and compliance.
