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Friday, March 23, 2018

Parliament passes Payment of Gratuity (Amendment) Bill 2018

‘Gratuity’ ~ the dictionary meaning is :  a tip given to a waiter, taxi driver, etc. It also means :  sum of money paid to an employee at the end of a period of employment.  Every employee looks forward to peaceful retirement as they near the homebend !!

For topic of the day – it is about Employee benefit (social security !) .. ..  Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. The Gratuity Act applies to establishments employing 10 or more persons.  The primary objective of providing a gratuity scheme is to provide a retiring benefit to the workman who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.

In Western Nations the concept of Social security is "any government system that provides monetary assistance to people with an inadequate or no income." Social security is enshrined in Article 22 of the Universal Declaration of Human Rights, which states: Everyone, as a member of society, has the right to social security and is entitled to realization, through national effort and international co-operation and in accordance with the organization and resources of each State, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality.

In economic parlance, Gratuity is a defined benefit plan given by the employer to the employee parting for the services rendered.  In India, we have a statue - Payment of Gratuity Act, 1972 - an Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto. It was  enacted by Parliament in the Twenty-third Year of Republic of India and called  Payment of Grataity Act, 1972.

Section: 4 of the Act states :  Payment of gratuity. (1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, - (a) on his superannuation, or (b) on his retirement or resignation, or (c) on his death or disablement due to accident or disease: Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement: Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.

As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or disablement. In such case mandatory gratuity is payable. Gratuity is paid at a rate of 15 days wages for every completed year of service or part thereof in excess of Six months. The wages here means wages last drawn by the employee. The "15 Days Wages" will be calculated by dividing the last drawn wages by 26 and multiplying the result with 15.

The good news for employees is that  Parliament has passed the Payment of Gratuity (Amendment) Bill which will increase the ceiling of tax-free gratuity amount to Rs 20 lakh from Rs 10 lakh. Further, this will allow the government to increase the gratuity ceiling from time to time without amending the law.

The amendment bill is seen as a  long awaited change, much expected to bring private sector employees at par with their public sector counterparts as far as gratuity ceiling is concerned. The gratuity amendment act, once it comes into force after receiving Presidential assent and publication in the Official Gazette, would provide greater defined benefit advantage for employees as it is likely that income tax limits are increased as it has been the case in the past. The amendment also gives flexibility to the Government to extend the ceiling in the future by mere notification as opposed to the requirement of an amendment.

The amendment further  allows the government to fix the period of maternity leave for female employees as deemed to be in continuous service in place of the existing 12 weeks  enhancing the maximum maternity leave period to 26 weeks.

The enhancement in ceiling could mean  that  tax liability will be nil in respect of  any amount upto Rs.20 lakh as gratuity. After the Amendment bill comes to force, the government may raise the limit of Rs. 20 lakh further to increase the cap in gratuity amount as and when the need arises without having to change the law. Amount of gratuity is directly proportional to the tenure of service, and also to the last drawn salary.  According to the  formula, the time period of over six months or more is considered as one year.

Section: 13 of the Act categorically states that :  No gratuity payable under this Act and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under section shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.

With regards – S. Sampathkumar
23rd Mar 2018.

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