Gratuity explained: Delay in payment? You are entitled to receive interest

The Allahabad High Court recently ruled that gratuity for government employees is based on years of service, not retirement age. “Retirement at sixty years is not an entitling fact, which leads the employee to acquire a right to receive gratuity, which he otherwise does not have. An employee gets his right to gratuity according to the number of years he serves,” said the single bench of Justice J J Munir.

The Payment of Gratuity Act, 1972, defines employee eligibility and how gratuity is calculated and requires its prompt disbursement by employers.

What is gratuity?

Gratuity is a financial reward from employers to employees who meet specific criteria. “Gratuity is not part of the regular monthly salary,” says Aslam Ahmed, partner, Singhania & Co.

Gratuity is not only payable at retirement. “Employees can also receive gratuity upon superannuation, resignation, death or disablement, retrenchment, voluntary retirement, and termination,” says Harshita Agarwal Sharma, director, Lexlevel Services.

Time criterion applies

Organisations with 10 or more employees over the past year must pay gratuity. In non-mining roles, a year consists of 240 working days; in the mining sector, it is 190 days.

Employees with at least five continuous years of service with an organisation get gratuity. “There are certain exceptions to the five-year rule, such as termination of employment before completion of five years due to disablement or death,” says Vipul Jai, partner, PSL Advocates & Solicitors.

Employees qualify for gratuity upon completion of 4 years and 240 days if the company’s work week is six days. “Employees on a five-day work week will be entitled to gratuity on completing 4 years and 190 days of continuous service,” says Padmanabhan Ananth, partner, Counselence.

In some cases, gratuity is paid after 10 years of service, such as in the case of employees covered under the Working Journalist and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provision Act.

Taxation of gratuity

The tax treatment of the gratuity amount depends on the type of employee: government or private-sector.

According to the Gratuity Act, the gratuity amount cannot exceed Rs 20 lakh, so any excess amount would be treated as ex-gratia. “Amounts exceeding the exempt limit are taxable according to the employee’s income slab under Section 10(10) of the Income-Tax Act, 1961,” says Ahmed.

The gratuity received by any government employee (central/state/local authority) is exempt from taxation.

For private sector employees that qualify for gratuity, the income tax exemption limit on gratuity is the least of the following amounts: gratuity of Rs 20 lakh; last 15 days of salary (number of days in a month taken to be 26) multiplied by the number of years of employment; or actual gratuity received.

Keep nominations updated

Understand the Gratuity Act and updates in rules  as employers sometimes refuse to pay it and mislead employees. Learn the calculation: Service over six months, for instance, counts as a full year. Keep nominations updated. Finally, if gratuity is not paid within 30 days of termination, the employer must pay interest as set by the central government.