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Specifics in Payment of Gratuity – Case Study

Posted by: The ADP Team on 7 August 2019 in Compliance, Finance, HR, Human Capital Management, Non classé

(Coffee Break Compliance Guide – Volume 50, by Subramaniam Anandan)

One of my friend who is a Human Resource representative, shared the following few cases and was asking about the compliance under coverage of Payment of Gratuity Act, 1972.

Case study 1:    A candidate who wanted to take up a position in the establishment and has stated that he had already availed a Gratuity of INR25,00,000/- (Rupees Twenty five lakhs) in his previous establishment, at the time such separation.  Does he needs to be covered under the Payment of Gratuity Act in our establishment?  If yes, how and why?

Case study 2:    A disabled candidate is joining our establishment, do we need to take any extra-precautions for considering the candidate under Payment of Gratuity Act?

Case study 3:    A candidate who is joining us declared that she has already availed a Gratuity to the extent of INR7,00,000/- in her 2 previous establishments.  What do we need to consider while covering her under Payment of Gratuity Act?

Before going further in analysing the case studies, let us understand key factors under the provisions of the Act considering the above queries.

  • Gratuity is a social security benefit extended to the employees by the employer, where such establishment is covered under the Payment of Gratuity Act, 1972
  • The statutory ceiling of INR20,00,000 (Rupees Twenty Lakhs) applies to eligible employees, to the aggregate of gratuity received from one or more employers, in the same or different years
  • Where the gratuity was received in any one or more earlier establishment/s and any exemption was allowed for the same, then the exemption to be allowed during the current year gets reduced to the extent of exemption already allowed, from the overall limit being INR20,00,000 (Rupees Twenty Lakhs, which is current statutory ceiling under Income Tax Act).
  • This limit is applicable only for the purpose of tax computation under Income Tax Act.
  • Section 10(10(ii) of Indian Income Tax Act states that, Gratuity received by the employees who are covered under the Payment of Gratuity Act, is exempt to the extent of, the least of the following:
    • Amount actually received as gratuity
    • Based on last drawn salary, 15 days salary for each completed years of service or part thereof in excess of 6 months
    • Statutory limit of INR20,00,000
  • Where Gratuity received by the employees who are Not covered under the Payment of Gratuity Act (where the establishment has less than 10 employees), is exempted up to the least of the following-
    • Amount actually received as gratuity
    • Average salary * (1/2*Number of years of service)
    • Statutory limit of INR20,00,000
  • Such gratuity is exempted as income through provisions of the Income Tax Act, upto such limit as prescribed time to time.
  • Where Gratuity is payable for Nominees (Spouse or Legal heirs of employee) in case of the death of an employee – any gratuity received by employee’s widow or legal heirs is completely tax-free in their hands.
  • Whereas Gratuity is payable for an employee, which was due and paid, but employee was deceased and payable to Nominees will be taxable in the hands of Nominee/Legal Heir. To be shown as “Income from other sources”
  • Any Gratuity received by Central and State Government employees, defense employees and employee’s in local authority during death or retirement is completely tax-free. Whereas such Gratuity is payable to an employee due to resignation before retirement, such amount is taxable.

Clarification for Case study 1: An employee, who is a new joinee in an organization, is eligible under Payment of Gratuity Act, where the establishment is covered under such legislation.  In this specific case the employee has already availed Gratuity through his previous establishment, which needs to be considered, only for the purpose of Income tax exemption computation. 

The clarification to the query raised, whether he needs to be covered under the Payment Gratuity Act, is YES.

Reason for eligibility: There is no cap for Payment of Gratuity payable for an employee, in the same organization or in different organizations.

As per the Section 4(5) of Payment of Gratuity Act: Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

Where an employer is paying premium to an Insurance Policy to cover the Gratuity Payment for their employees, they may not restrict the Gratuity to the statutory limit, for such employees who will be eligible for more, in case of separation.  The employer can only consider to deduct income tax for the sum which exceeds the statutory limit with his current sum or consolidated sum adding to the previous, if any.

If the employee had received Gratuity in his previous establishment/s and if he has not disclosed with current employer and if the consolidated sum of Gratuity for such employee attracts any income tax, then responsibility of paying such income tax, rests with the individual employee.

Clarification for Case study 2: Where a disabled employee, with benchmark disabilities of 40% or more joins an organization, the Employer needs to get copies of documents related to such benchmark disabilities for record.  If any Gratuity payment is due to such employee, during his separation, upon payment of Gratuity, the Employer may get a reimbursement of 1/3rd of the sum disbursed, from the Government.  This is just to incentivise such Employers who engage such benchmark disabled persons.   The incentive is limited to Employer only.

This is different from Payment of Gratuity to an employee, who, upon employment injury or disease, become disabled and be eligible.

Clarification for Case study 3:   It is almost similar to the case 1.  As the employee can be considered as normal employee and covered under the Act and if she is eligible for gratuity upon her separation, then Rupees Seven Lakhs already received by her shall also to be considered for the purpose of computing Income tax.


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TAGS: Employer Responsibilities Gratuity Act Human Resources

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