Case Studies

GRATUITY
Payment of Gratuity Act - 1972
Rino Angusamy -
Meenakshi College For Women, Madurai
May 2019
WHO AM I?
RINO ANGUSAMY

MBA STUDENT
Background Aspiration Other Interests
FIRST YEAR
• From Ramanathapuram • To establish and succeed • Travelling to places
• B-Com in my own business in • Tennis
• Now pursuing MBA Madurai. • Cattle Farming
• Part time as , Asst Sales
Manager in a Sea Foods
Export Company

To develop myself as a socially responsible individual and to empower women in the society through my gained academic and
practical experience.
 Gratuity - Quick Info
Gratuity is a reward for employee loyalty

What is Gratuity?
employee loyalty. If an employee stays on in a company for over five years, he is entitled to get
Gratuity is a reward for
gratuity when he retires, resigns or is retrenched.

monetary reward to be paid by the company in recognition of the employee's years of service in the organisation is
The

mandated by the Payment of Gratuity Act, 1972.

Most establishments employing 10 or more workers come under the Act. Roughly, the employee gets half a
month’s Basic and Dearness Allowance (DA) for every completed year of service as gratuity.

Formula for Calculation of Gratuity Amount:

Listed below are the components that go into calculation of gratuity amount. The amount is also dependent upon the number of years
served in the company and the last drawn salary.
If,
N = number of years of service in a company
B = last drawn basic salary plus DA
then,

Gratuity = N*B*15/26
Few Significant Points about Gratuity
Taxation on > 10 Lakhs Rupees
An employee can receive a gratuity
amount higher than Rs.10,00,000 from
his/her employer, the exemption for tax is
applicable as per new taxation rules.
According to the Payment of Gratuity Act of 1972
Tax-free Gratuity Limit
In the recent Interim Budget of 2019, interim
finance minister, Mr. Piyush Goyal announced that
the existing tax-free gratuity limit will be increased
to Rs.30 lakh.
Employer’s Right
The employer has the right to reject payment of
gratuity to an employee if he/she has been asked to
leave his/her job owing to any misconduct.
Employee’s Death
In case of death of the employee, the nominee or
heir of the employee is paid the gratuity amount.
The taxation for this is calculated for the receiver
under the head – income from other sources.
Case Studies
Let us look at some of the case studies as below

Case Study 1 Case Study 2 Case Study 4

Simple and Straight Employees who are not Case Study 3 Employer and Supplier
Forward Case covered under the Contract
In case of death of an
Gratuity Act:
employee
Case Study 1 - Simple and Straight Forward
if Amit is an engineer who has worked with SF Company for 20 years of service and had Rs.25,000 as his
last drawn basic plus DA amount, then,

20 25,000 15/26 2,88,461.54

Basic + DA
Final Figures
At the time of releasing
As per the act

Years Conversion Factor

No of years in service No of weeks per year and
working days in a month
Case Study 2 - Employees who are not covered under the Gratuity Act
When it comes to paying gratuity to an employee, an employer is not restricted by the law even if the organisation is not covered under the Gratuity Act.

Mr. X is an employee of ABC Pvt. Ltd. which is not covered under the Gratuity Act. The last basic salary that he has drawn is Rs.50,000 per month. He has been working in the
organisation for 10 years and 8 months. Thus, the gratuity amount for Mr. X will be as follows:

Formula for Gratuity calculation:

The following formula is considered for the calculation of gratuity amount for employees who are not covered under the Gratuity Act:
Gratuity Amount = (15 * Last drawn salary amount * period of service) / 30

(15 50000 11)/30 2.75 Lakh

Basic + DA
Final Figures
At the time of releasing
As per the act

Years Conversion Factor

No of years in service No of weeks per year and
working days in a month
Case Study 3 - In case of death of an employee
In case of death of an employee, the gratuity benefits are calculated on the basis of the tenure of service of the employee.

Tenure of service Amount payable towards gratuity

Less than a year 2 * basis salary
1 year or more but less than 5 years 6 * basic salary
5 years or more but less than 11 12 * basic salary
years
11 years or more but less than 20 20 * basic salary
years
20 years or more Half of the basic salary for each completed six-monthly
period. However, it is subject to a maximum of 33 times
of the basic salary.
Case Study 4 - Employment as a Contractor
The case is in on company (XYZ), few workers are working for above 5 years under one
contractor (C1).
Recently they have changed the contractor (C2) who is associated with that same
company but those workers are still working with the same company (XYZ).
Now they are demanding gratuity...so who is liable to pay...principle employer or
contractor???
This is totally contractual job so contractor Actually as per the Contractor Agreement with the The Contractor(c1) has to pay
should pay the gratuity to them if contractor fail Principle Employer and Work order issued to him the Gratuity other wise the
or deny to pay then principal employee will be monthly. Contractor will claim the CTC amount and the principal employee is ultimate
same liable amount can be transferred to other
totally liable to pay.. contractor after discussion with Management.
responsibility

Actually it is a legal question and it is better the lawyer answers the question J
THANK YOU.