Gratuity Explained: Entitlement to Interest on Delayed Payments

30 May, 2024

The Allahabad High Court recently clarified that the entitlement to gratuity for government employees is determined by the length of service rather than the retirement age. Justice J J Munir stated, "Retirement at sixty years is not a qualifying factor for acquiring a right to gratuity. An employee earns the right to gratuity based on the number of years served."

The Payment of Gratuity Act, 1972, outlines employee eligibility, the calculation method for gratuity, and mandates its timely disbursement by employers.

What is Gratuity?

Gratuity is a monetary reward given by employers to employees who meet certain criteria. As Aslam Ahmed, partner at Singhania & Co., explains, “Gratuity is not included in the regular monthly salary.” It is payable not only at retirement but also upon superannuation, resignation, death or disablement, retrenchment, voluntary retirement, and termination, according to Harshita Agarwal Sharma, director at Lexlevel Services.

Time Criteria for Gratuity Payment

Companies with 10 or more employees over the previous year are required to pay gratuity. For non-mining sectors, a year is defined as 240 working days, while for mining sectors, it is 190 days.

Employees who have served continuously for at least five years with an organization are entitled to gratuity. Vipul Jai, partner at PSL Advocates & Solicitors, notes, “There are exceptions to the five-year rule, such as termination due to disablement or death.”

Employees are eligible for gratuity after completing 4 years and 240 days of continuous service if the work week is six days. For a five-day work week, eligibility is after 4 years and 190 days of service, as noted by Padmanabhan Ananth, partner at Counselence.

In certain situations, such as for employees under the Working Journalist and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provision Act, gratuity is paid after 10 years of service.

Taxation of Gratuity

The tax treatment of gratuity depends on whether the employee is in the government or private sector. According to the Gratuity Act, the maximum gratuity amount is Rs 20 lakh; any amount above this is treated as ex-gratia. Ahmed explains, “Amounts exceeding the exempt limit are taxable according to the employee’s income slab under Section 10(10) of the Income-Tax Act, 1961.”

Gratuity received by government employees (central, state, or local authority) is fully exempt from taxation.

For private sector employees, the tax exemption limit on gratuity is the lesser of the following: Rs 20 lakh, 15 days of salary for each year of service (with a month defined as 26 days), or the actual gratuity received.

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