Gratuity

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 April 2012 Hello all, I have one query about gratuity Act. In my company there are only 8 empoloyees, but if any employees have completed 5 years than is gratuity act is applicable to us??

CA Rakesh Goenka

CA Rakesh Goenka (Expert)
Follow

07 April 2012 You have to understood the fact that Gratuity is not coming under the purview of EPF Act. It is a separate legislation applicable to all the company having more than 20 employees.

Eligibility of Gratuity will only arise only in case of resignation / termination / discharge of an employee and that too gratuity is eligible only for employee who has completed 5 years of service in a company.

It is based on 15 days salary per year of service. The max amount of Gratuity that one can get is Rs 10 lakhs.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

26 July 2024 Yes, the Payment of Gratuity Act, 1972 is applicable to your company even if you have only 8 employees, provided certain conditions are met. Here’s a detailed explanation:

### **Applicability of the Payment of Gratuity Act, 1972:**

1. **Threshold for Applicability:**
- The Payment of Gratuity Act, 1972 applies to establishments with **10 or more employees**. This threshold refers to the total number of employees at any time during the financial year.

2. **Employees Covered:**
- Since your company has 8 employees, the Act would not apply to your company directly as it is below the threshold of 10 employees. However, if your company grows to 10 or more employees at any time, then the Act would become applicable.

3. **Voluntary Compliance:**
- Even if the Act is not mandatory for your company (because you have fewer than 10 employees), you can choose to comply with the provisions of the Act voluntarily. This means you can provide gratuity benefits to employees as per the Act’s provisions if you wish to do so.

4. **Gratuity Eligibility:**
- If the Act is applicable (i.e., when you have 10 or more employees), employees are eligible for gratuity after completing 5 years of continuous service. The gratuity amount is calculated based on the formula provided in the Act:
- **Gratuity = (Last drawn salary × 15/26) × Number of years of service**

5. **Legal Requirement:**
- If your company eventually reaches or exceeds the threshold of 10 employees, you must comply with the Payment of Gratuity Act, 1972, and provide gratuity to employees who meet the eligibility criteria.

### **Summary:**

- **For Your Current Situation:** The Payment of Gratuity Act is not mandatory for your company since you have fewer than 10 employees.
- **Voluntary Compliance:** You can still choose to pay gratuity to employees as a matter of policy if you wish to provide this benefit.
- **Future Compliance:** If your employee count increases to 10 or more, you will need to comply with the Act’s provisions.

### **Recommendation:**

- **Document Your Policy:** If you choose to provide gratuity benefits voluntarily, ensure that your company’s policy is clearly documented and communicated to all employees.
- **Actuarial Advice:** For calculating gratuity liabilities and managing funds, consider seeking actuarial advice to ensure accurate provision and compliance.

Upgrade to CAclubindia Pro. Subscribe Now!