Gratuity Compliance Checklist

The Act applies to every factory, mine, oilfield, plantation, port, and railway company, and every shop or establishment where 10 or more persons are employed or were employed on any day in the preceding 12 months. Once applicable, it continues to apply even if employee strength falls below 10.

Gratuity is payable to every employee who has completed a minimum of 5 years of continuous service upon superannuation, resignation, retirement, death, or disablement. In the case of death or disablement, the 5-year condition is waived under Section 4(1).

For employees not covered under a seasonal establishment, gratuity equals (last drawn wages x 15 x number of years of service) / 26. 'Wages' means basic wages plus dearness allowance. The maximum gratuity payable was increased to INR 20,00,000 (INR 20 lakh) by the 2018 amendment.

Under Section 4(2), if an employee has completed more than 6 months of service in the final year, it is rounded up to the next complete year for gratuity calculation purposes. For example, 7 years and 8 months is treated as 8 years.

Under Section 6 and Rule 6 of the Payment of Gratuity (Central) Rules, 1972, every employee must nominate one or more persons to receive gratuity in the event of their death. The nomination is made in Form F and must be obtained within 30 days of the Act becoming applicable or within 30 days of an employee completing one year of service.

Employees must update nominations upon acquiring a family (marriage, birth of child). As per Rule 6, an employee who has a family at the time of nomination must nominate family members only. Fresh nomination forms must be filed when family circumstances change.

The employer must maintain a register of all nominations received in Form L under Rule 8. This register should contain the employee's name, department, date of nomination, and the name and relationship of nominee(s).

Under Rule 4A, the employer must display an abstract of the Payment of Gratuity Act and Rules in English and in the language understood by the majority of employees at a prominent place in the establishment.

Under Section 4(3), the employer must determine the amount of gratuity and pay it within 30 days of the date it becomes payable (i.e., from the date of superannuation, retirement, resignation, death, or disablement). Delayed payment attracts simple interest from the employer.

The employee or their nominee must submit Form I (application for gratuity by an employee) or Form J (application by a nominee or legal heir in case of death). The employer must issue Form L (notice of payment) or Form M (notice of rejection with reasons) within 15 days.

For non-government employees, gratuity up to INR 20 lakh is exempt from income tax under Section 10(10) of the Income Tax Act. Any amount exceeding this is taxable. Deduct TDS at the applicable rate and deposit it with the government.

Under Section 4(6), gratuity can be wholly or partially forfeited only if the employee's services were terminated for riotous or disorderly conduct, or any act of violence, or for an offence involving moral turpitude committed during employment. Forfeiture must be supported by a domestic inquiry.

Record every gratuity payment in the Gratuity Register (Form O) showing employee details, service period, last drawn wages, gratuity amount, date of payment, and nominee details. This register must be available for inspection by the Controlling Authority.

Under Section 4A, employers (other than Central/State Government establishments) must obtain an insurance policy for their gratuity liability from the Life Insurance Corporation (LIC) or any approved insurer, or establish an approved gratuity trust fund. Failure to do so is an offence under the Act.

In lieu of insurance, the employer may set up an irrevocable gratuity trust approved by the Commissioner of Income Tax under Part C of the Fourth Schedule of the Income Tax Act. Contributions to the trust are tax-deductible under Section 36(1)(v).

Under Ind AS 19 (Indian Accounting Standard for Employee Benefits), the gratuity obligation must be valued annually using the Projected Unit Credit Method by a qualified actuary. The valuation determines the provision to be recognised in the financial statements.

Disclose the present value of the defined benefit obligation, fair value of plan assets (if funded), net liability, actuarial gains/losses, and the components of gratuity cost (current service cost, interest cost, expected return on plan assets) in the notes to the financial statements.