Payment of Gratuity

Payment of Gratuity

Company which are fulfilling the following conditions have to pay Gratuity to employees when they resign or retire as per Gratuity Act 1972 and its subsequent amendments. Some aspects of Gratuity payment rules are mentioned below.

1. Company should have at least 10 employees on their payroll – while processing the Full and Final the option is available with the Payroll Manager to decide if gratuity has to be paid or not.

2. There is a Madras High Court ruling which mentions that a duration of 4 years and 240 days makes an employee eligible for gratuity.

3. Gratuity is to be paid in case of death, resignation, retirement or termination of service
a) If the employee has died or has had permanent disability then the constraint of 5 years is not applicable and he is eligible for gratuity for the period worked
b) If an employee resigns or retires then he should have had minimum 5 years of continuous service. But as per Section 4(2) of the Payment of Gratuity Act - if an employee works for more than 6 months in an year than it is considered as a year. This makes anyone working for more than 4 years and 6 months eligible for gratuity. Companies are free to pay gratuity to employees who have served lesser period also.
c) You can define separate condition for employees whose employment is being terminated
d) For Journalists the minimum period of employment to become eligible for gratuity is 3 years. To model this conditions you will need to set the parameter on employee's Payroll Details page - refer article for more details.
e) If an employee is taken for a fixed term contract then gratuity is payable if the employment is for one year or more. The option to hire an employee for a fixed term contract is explained in the article on HRIS Setup

4. The period of training or internship is not included as employment period. So only confirmed employees are eligible for gratuity. Gratuity is payable from "Date of Joining", the date from which they start working in the company is captured as "Date of Entry"

5. Continuity of employment – if employees are transferred within the group to another company their employment contract from one company is terminated and a new one is started. In such condition there is continuity of employment and period for the purpose of gratuity calculation is taken from earliest date of joining in the new company (also referred to as Group Date of Joining). If the previous employment in the group company is not captured in EazeWork HRMS then you can use the Gratuity Initialization Date parameter to initialize gratuity calculations from a date earlier than Date of Joining.

6. Payment of gratuity while getting transferred within the group - there is an option to pay gratuity when you are transferring the employee from one company to another within a group. System will update the last working date in the first company as gratuity paid upto date and any subsequent payment would be only for a period which will be after this date. If the employee is eligible but you are not paying gratuity in Company A then also the Gratuity Initialization Date in Company B would be set as LWD (of Company A) + 1. If you transferring an employee from Company A which is based in India to Company B which is not based in India then you can pay the gratuity till employee's last working day in Company A. If the employee is transferred back from Company B to Company A after some time you can update the Gratuity Initialization Date on employee's payroll records as date of joining of Company A (second stint) to avoid paying gratuity for the Company B tenure.

You can setup the period beyond which gratuity is to be paid in Payroll general setup.

Calculation of Gratuity

Gratuity is calculated based on the following formula
1. Calculate the number of years of completed service by comparing Last Working Day and Date of Joining - this will give number of years, months and days. The number of years are then compared with the eligibility condition in setup to decide if the employee is eligible for gratuity. For employees who are getting mapped to the Default condition the eligibility condition in the setup is considered only if it is less than 4 years and 6 months as the Government mandated condition is 4 years and 6 months.

2. Once the employee is eligible then the number of years for which gratuity is paid is calculated. If someone has worked for 6 months or more in the last year it is rounded up to 1 year. So 6 years, 6 months of employment is rounded up as 7 years. Similarly if someone has worked fro 5 years 5 months and 20 days he will be paid based on 5 years.

3. The basis for gratuity payment is defined by selecting the applicable heads in Deduction and Encashment grid. Typically is the heads include Basic, DA
Gratuity = No of years of service x (Salary basis) x 15 / 26

Tax Impact of Gratuity

For Private Sector
1. Total payment of upto INR 20 lakhs is tax exempt - and this also includes any gratuity received by the employee from previous employers, this amount is captured at the time of joining from a new employee and can also be updated during the full and final processing. Note before 1/April/2018 the tax exempt amount was INR 10 lakhs
2. If the employer pays gratuity higher than the government norm then the extra payment is taxed at normal rates


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