The Indian government has announced a major change to the gratuity rules, reducing the eligibility period from 5 years to 1 year. This change, which affects millions of employees, aims to strengthen welfare measures for workers and bring more clarity to gratuity payments across sectors.
Who Benefits From This Change?
Fixed-term employees, who are hired for a specific period or project, will now be eligible for gratuity after completing just 1 year of service. This change will provide them with stronger financial stability, particularly during job transitions.
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Key Highlights Of The New Gratuity Rule
- Fixed-term employees will receive gratuity after 1 year of continuous service, instead of 5 years.
- The definition of 'wages' has been expanded to include additional components, increasing gratuity payouts.
- Gratuity will be calculated on a higher base, benefiting employees.
- Employers must pay gratuity within 30 days, failing which a 10% annual interest will be imposed.
Impact on Employers and Employees
The new rule is expected to encourage formal employment, promote direct hiring, and reduce excessive contractualisation. Also, the employers will need to update their payroll and human resources policies to capture the expanded definition of wages. FTEs will be entitled to the same salary structure, leave facilities, medical benefits and social security measures as regular employees.
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When Will Gratuity Be Payable?
Gratuity shall be payable to an employee on the termination of their employment after he has rendered continuous service for not less than five years:
- on their superannuation, or
- on their retirement or resignation, or
- on their death or disablement due to accident or disease
- The Rules Are Applied To...
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The Labour Code mentioned that in case of the death of the employee, gratuity payable to them shall be paid to their nominee or, if no nomination has been made, the amount to be given to their heirs. If the nominee or heirs are a minor, the share 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".
Every factory, mine, oilfield, plantation, port and railway company. And every shop in which ten or more persons are employed, or were employed, on any day of the preceding twelve months.
How Is Gratuity Calculated?
Gratuity is calculated based on the employee's last drawn salary and years of service. Here's a simplified formula:
Gratuity = (Last drawn salary x 15/26 x Years of service)
- Last drawn salary includes basic salary and dearness allowance (DA)
- 15 = number of days in a month (as per labour laws)
- 26 = average number of working days in a month
- Years of service = completed years of service (rounded off to the nearest integer)
The maximum gratuity limit is Rs 20 lakhs (as per the Payment of Gratuity Act, 1972). If the calculated gratuity amount exceeds this limit, the employee will receive the maximum limit of Rs 20 lakhs.
Gratuity is also tax-free in the hands of the employee.
