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 upper ceiling on gratuity amount under the Act was Rs. 10 Lakh. The provisions for Central Government employees under Central Civil Services (Pension) Rules, 1972 with regard to gratuity were also similar. Before implementation of 7th Central Pay Commission, the ceiling under CCS (Pension) Rules, 1972 was Rs. 10 Lakh. However, with the implementation of 7th Central Pay Commission, in case of Government servants, the ceiling has been raised to Rs. 20 Lakhs.
Considering the inflation and wage increase even in case of employees engaged in private sector, the 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.
The Bill as passed by both the Houses of Parliament, and assented 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.
Gratuity shall be payable to an employee on the termination of his / her employment after s/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:
Provided that the completion of continuous service of five years shall not be necessary where the
termination of the employment of any employee is due to death or disablement
As of now, the amount of gratuity payable to an employee shall not exceed Twenty lakhs (20 lakhs) as per Governmnent notifications. Does this mean that an employee in the private sector cannot get gratuity more than Rupees twenty lakhs? No. As per The Payment of Gratuity Act, 1972, “Nothing in this section shall affect the right of an employee receive better terms of gratuity under any award or agreement or contract with the employer.” So, an employee can very well receive gratuity amount in excess of the stipulated Rs. 20 lakhs However, any amount in excess of Rupees twenty lakhs is taxable.
The least of the following is exempt from tax:
- Last salary (basic + DA)* number of years of employment* 15/26;
- Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment);
- Gratuity Actually received
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 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