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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 rules 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.
The following new gratuity rules are listed regarding the use of gratuities:
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 rules, if a company’s employee count falls to less than 10, it must still pay the gratuity.
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)/26No 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.
New Gratuity Rules – In general, gratuity is paid after retirement, however, there are some circumstances in which it can be given beforehand. These reasons include:
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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.
Any gratuity that government employees receive, except 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 CalculatorEven 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 circumstances in which employees are entitled to gratuities are described in the sections below.
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.
There are three steps to paying a gratuity:
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 rules, 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 rules 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.
New Gratuity Rules – 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.
According to the gratuity rules 2024, companies have to make sure that base pay makes up 50% of an employee's CTC (cost to business), with employee allowances, housing rent, and overtime making up the remaining 50%. Any additional allowances or exemptions paid by the firm beyond 50% of the CTC will be considered compensation.
Typically, gratuity eligibility requires five years of continuous service. However, under certain interpretations of the law and specific company policies, employees with 4 years and 7 months of service may be eligible if their employer rounds up the period to five years. This is not universally applicable and depends on individual employer policies.
Gratuity in the private sector is calculated using the formula: Gratuity = (Last drawn salary × 15 × Number of years of service) / 26. Here, the last drawn salary includes basic pay and dearness allowance. The total is divided by 26 to account for the average number of working days in a month, providing the final gratuity amount.
Yes, gratuity is compulsory for private limited companies. According to the Gratuity Act, any company employing ten or more employees is legally required to pay gratuity to eligible employees. This ensures that employees receive financial benefits for their service tenure upon leaving the company or retiring.
A company cannot refuse to pay gratuity if the employee meets the eligibility criteria outlined in the Gratuity Act. Refusal can lead to legal action and penalties. However, if the employee has been terminated for misconduct, the company may deny gratuity payment under certain conditions.
Employees in the private sector are eligible for gratuity if they have completed at least five years of continuous service with their employer. This includes both permanent and contract employees. Exceptions include cases of death or disability, where the five-year requirement is waived, allowing immediate eligibility.
Gratuity is typically included in an employee's Cost to Company (CTC) as a component of their overall compensation package. It is calculated based on the employee's basic salary and tenure with the company, contributing to their long-term financial benefits. The exact amount varies depending on salary and years of service.
Yes, you are entitled to receive gratuity if you resign, provided you have completed at least five years of continuous service with the employer. This rule ensures that employees who have dedicated a significant period to the company receive their due financial reward upon leaving.
The maximum gratuity limit, as per current regulations, is ₹20 lakh. This cap applies to the amount an employer is required to pay to an employee as gratuity, regardless of the employee's salary or length of service. Any amount exceeding this limit is subject to the employer's discretion.
Gratuity in a salary slip is a component of the overall compensation package, often listed under long-term benefits or statutory payments. It represents the amount accrued towards gratuity based on the employee's basic salary and tenure with the company, though it is not paid out monthly.