What is Gratuity?
Historical Background
Key Points
8 points- 1.
Payment of Gratuity Act, 1972: The primary legislation governing gratuity before being subsumed under the new codes.
- 2.
Eligibility: Generally, an employee must complete at least 5 years of continuous service with an employer to be eligible. This condition is waived in case of death or disablement.
- 3.
Calculation: Gratuity is calculated based on the last drawn salary and the number of years of service. The formula is typically: (15 days' wages * number of years of service) / 26.
- 4.
Maximum Limit: There is a statutory maximum limit for gratuity payment, currently ₹20 lakh (for employees covered under the Act).
- 5.
Tax Exemption: Gratuity received is partially or fully exempt from income tax, subject to certain conditions and limits.
- 6.
New Labour Codes (Code on Social Security, 2020): This code aims to universalize gratuity, extending its applicability to a wider range of establishments and workers, including contract employees and fixed-term employees.
- 7.
Contract Employees: The news specifically mentions mandating gratuity for contract employees with a one-year term, significantly expanding its coverage to a previously underserved segment.
- 8.
Fixed-Term Employees: The new codes also provide for pro-rata gratuity for fixed-term employees even if they don't complete 5 years of service, provided their contract is not renewed.
Visual Insights
Gratuity Eligibility: Before and After Labour Codes
This table compares the eligibility criteria for gratuity before and after the implementation of the Labour Codes, particularly for fixed-term employees.
| Eligibility Criteria | Before Labour Codes | After Labour Codes |
|---|---|---|
| Minimum Service (General) | 5 years | 5 years (generally) |
| Minimum Service (Fixed-Term) | 5 years | 1 year |
| Applicability | Establishments with 10+ employees | Establishments with 10+ employees |
Recent Developments
4 developmentsThe Code on Social Security, 2020, once implemented, will replace the Payment of Gratuity Act, 1972, and significantly broaden its scope and coverage.
The current news highlights the specific provision in the draft rules for the new codes, mandating gratuity for contract employees with a one-year term, which is a major step towards inclusive social security.
This expansion is a significant move towards extending social security benefits to the unorganized sector and those in non-traditional employment arrangements.
Discussions on extending gratuity and other social security benefits to gig and platform workers are also part of the broader social security reforms under the new codes.