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Prof.

Kalpesh Prajapati

Payment of Gratuity Act, 1972


The Payment of Bonus Act, 1965

Gratuity
The Payment of Gratuity Act 1972 is a social security enactment. It is derived from the word gratuitous, which means gift or present. However, having being enacted as a social security form, it ceases to retain the concept of a gift but it has to be seen as a social obligation by an employer towards his employee.

Gratuity
A kind of retirement benefit. It is a payment that is intended to help an employee after his retirement. General principle - for faithful service over a long period the employee is entitled to claim a certain amount as retirement benefit. Earned by an employee for long & meritorious service.

The Payment of Gratuity Act, 1972


Object: Provides for a scheme for the payment of gratuity
to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. Authority: Different controlling authorities to be appointed by appropriate government for different states for the administration of this act. Gratuity Fund: Employer to maintain a gratuity fund or shall obtain a insurance from the Life Insurance Corporation of India for his liability for payment towards the gratuity under this Act.

Enactment of Payment of Gratuity Act {1972}


1. The proposal of Central legislation on Gratuity was discussed in the Labour Ministers conference held at New Delhi on 24th and 25th August,1971. 2. By the general agreement at the Labour Ministers conference and Indian Labour Conference it came in existence. 3. It came in to force at 16th Sep.1972.

Definitions
Appropriate Govt. In relation to an establishment: a) Belonging to, or under the control of Central Government. b) Having branches in more than one state. c) Of a major port, mine, oilfield or railway company, the Central Govt. In any other case, the State Government. Controlling Authority-an authority appointed by the appropriate govt.

Definitions
S.2 (e) "employee" means any person employed to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical or clerical work it does not include an apprentice S.2 (s) "wages" includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.

Scope And Coverage


The Act applies to the whole of India. The Payment of Gratuity Act 1972 applies to the whole of India and so far as it relates to ports and plantations it does not apply to the State of Jammu and Kashmir. It applies to Every mine , factory, oilfield, plantation, port & railway company. Every shop or establishment in which 10 or more persons are employed. The Act does not apply to: Persons who hold civil Posts under the Central Government or State Government.

Payment of Gratuity
It is a payment that is intended to help an employee after his retirement whether the retirement is due to superannuation or due to some physical disability. Formula Of Gratuity =(Last Month Wages *15* No. of completed year of service)/26
Payable if there is Continuous service of 5yrs (not necessary incase of death or disablement)

Calculation: W x Y x 15/26 where W = Last Wage drawn i.e., basic + DA Y = number of completed years of continuous service (six months or less to be ignored and more than six months to be counted as full year. 15 = 15 days salary 26 = No. of working days in a month.
Maximum Limit: Rs.3.5 lacs. (w.e.f 24-09-1997) Time Limit for application to employer: Employee has to make an application in Form-I to his employer within 30 days from the date of gratuity becomes payable. To calculate the gratuity: it has the formula

Ex. Number of yrs of service x Last salary drawn (Basic+D.A) X 15 26


This is the formula to calculate the gratuity.

Payment of Gratuity
1.Gratuity should be paid to an employee on the termination
of his employment after he has rendered service for not less than 5 yrs On his superannuation (Superannuation means the attainment of such age by the employee as is fixed in the contract or conditions of service as the age on the attainment of which he has to leave the employment where there is no such provision, then attainment of the age of 58 years by the employee.) His retirement His resignation On his death or disablement due to disease or accident

Payment of Gratuity
Gratuity shall be payable to an employee Who has rendered continuous service for not less than 05 years on the termination of his employment on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease: Note:The completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Payment of Gratuity
Condition: Completion of continuous services of five years is not necessary when the termination of employee is due to death of disablement. In case of death of employee gratuity payable to him is paid to his nominee. 2. For every completed year of service or part, the employer shall pay gratuity to the employee at the rate of fifteen days wages based on the rate of the wags last drawn by the employee concerned.

Payment of Gratuity
3.The amount of gratuity payable to an employee shall not exceed three lakhs and fifty thousand rupees. 4. Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

Nomination
1. If an employee has a family at the time of making a nomination, the nomination shall be made in favor of one or more member of his family . 2. If any nomination is made by an employee in favor of a person who is not the member of his family, shall be void (Invalid). 3. If an employee has no family at the time of making a nomination, the nomination shall be made in favor of any person or persons

Nomination
4. If the employee acquires a family after making a nomination then such nomination become invalid, and a fresh nomination is made in favor of a family member. 5. Every nomination , fresh nomination or alternation of nomination shall be sent by the employee to his employer, who shall keep it in his safe custody.

Determination of the Amount of Gratuity (Sec.7)


Application for gratuity[sec7(1)]:

An employee who is eligible for payment of gratuity can give an application in writing to the employer within 30 days from the date the gratuity becomes payable.

Determination of the Amount of Gratuity (Sec.7)


Determination of gratuity [Sec7(2)]: Employer determine the amount of the gratuity and give notice to controlling authority and the employee. Payment of gratuity[sec7(3)]: Employer pay the amount of gratuity to the employee.

Determination of the Amount of Gratuity (Sec.7)


Payment of interest[sec7(3A)]: Interest is paid if the amount of gratuity is not paid within a period of 30 days at the rate notified by central government. Dispute as to Gratuity[sec7(4)]: If disputes arises regarding the amount of the gratuity and the claim taken by nominee the employer deposit the amount to the controlling authority, and he solve the dispute.

Inspectors(Sec.7A)
Appointed by the Government for the purpose of this act. Two or more inspector can be appoint for the same area. Every Inspector shall be deemed(Consider)to be a public servant within the meaning of section 21, of the Indian Penal Code, 1860.

Powers of the Inspectors(Sec 7B)


Ask for any information from the employer. Examining any register, record or notice or other documents. Search and seize(Take) register, record, notice or other document in respect of offence;

Recovery of Gratuity(Sec 8)
Controlling authority issued certificate to the collector on behalf of aggrieved party. Collector recover the amount together with compound interest. Amount of interest should not exceed the amount of gratuity.

Penalties
Whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other person to avoid such payment, knowingly(Intentionally) makes or causes to be made any false statement or false representation shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees or with both.

Offences and Penalties: The penalties leviable in respect of the various offences under the Act are as follows:

OFFENCE
1.

PENALTY

Making a false statement or false Imprisonment up to 6 months or fine up to representation to avoid any payment Rs.10,000 or both under the Act

2. Contravention or non-compliance of Imprisonment up to one year or fine up to any provision of the Act or the Rules Rs.20,000 or both (minimum imprisonment for 3 months and fine up to Rs.10,000) 3. Non-payment of any gratuity payable Imprisonment up to two years (minimum 6 under the Act months) or fine up to Rs.20,000 (minimum Rs.10,000) or both Failure to make payment by way of Fine up to Rs.10,000 and Rs.1,000 for each premium for compulsory insurance u/s day during which the offence continues. 4A(1) or by way of contribution to an

4.

Protection Of Gratuity
No gratuity payable under this Act and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under section shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.

Power to make rules.


The appropriate Government may, by notification make rules for the purpose of carrying out the provisions of this Act. Every rule made by the Central Government under this Act shall be laid, as soon as may be after it is made, before each House of Parliament while it is in session.

Case Law Studies


Indian Hume Pipe Co. Ltd. V/s Workmen
HELD:- The general principle underlying gratuity schemes is that by faithful service over a long period the employee is entitled to claim a certain amount as retirement benefit.

Delhi Cloth and General Mills Ltd. V/s Workmen


HELD:- The object of providing a gratuity scheme is to provide a retiring benefit to the workmen who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.

Case Law Studies


DBR Mills Ltd. V/s Appellate Authority
HELD:- Cessation of work by the employee on these days cannot be said to be due to any fault of the employee. Therefore, he would be deemed in continuous service if he has been actually employed by an employer during the 12 months, immediately preceding the year for not less than 240 days in an establishment.

Patel Hiralal Ramlal & Co. Vs. Smt. Chandbib Pirubhai


HELD:- The workmen carrying raw materials from the employers premises to their home and rolling up bidis at their home for manufacturer are employees, and as such are entitled to claim and payment of gratuity.

THANK YOU

The Payment of Gratuity Act, 1972


Object: Provides for a scheme for the payment of gratuity
to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. Authority: Different controlling authorities to be appointed by appropriate government for different states for the administration of this act. Gratuity Fund: Employer to maintain a gratuity fund or shall obtain a insurance from the Life Insurance Corporation of India for his liability for payment towards the gratuity under this Act.

The Payment of Gratuity Act, 1972


Payment:

Gratuity payable to employee on termination of his employment after rendering continuous service for at least five years. Gratuity payable on employees superannuation (retired with a pension, or retire somebody with a pension), retirement or resignation, death or disablement due to accident or disease.

Penalty: Any employer who contravenes (Break)or makes default

in complying (Obey)with any of the provisions of this act shall be punishable with imprisonment (Custody)for a term not less than three months and can extend to one year, or with a fine not less than Rs 10,000 extending up to Rs 20,000 or both.

Payment of Gratuity Act, 1972


Gratuity imports an idea of a gift or a present in return for favour of services generally, but the Payment of Gratuity Act reverses this norm. The Payment of Gratuity Act, 1972, a social security enactment (Passing), which provides a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto. Section 4 (3) of the Principal Act has recently been amended by the Payment of Gratuity (Amendment) Act, 1998 enhancing the ceiling of gratuity payable from Rs.2.5 lakhs to 3.5 lakhs. Welfare measures such as pension, provident fund, gratuity, etc. are in conformity with the directive principles of State Policy as adumbrated in Part IV of the Constitution of India.

Genesis (Origin) of the Act


Gratuity as an additional retirement benefit has been secured by labour in numerous instances, either by agreement or by awards. It was conceded as a provision for old age and a reward for good, efficient and faithful service for a considerable period. The Supreme Court had laid down certain broad principles to serve as guidelines for the framing of the gratuity scheme. They were: 1. The general financial stability of the concern; 2. Its profit-earning capacity; 3. Profits earned in the past; 4. Reserves and the possibility of replenishing the reserves; and 5. Return on capital, regard being had to the risk involved.

Object of the Act


The Act provides for a scheme of compulsory payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, motor transport undertakings, shops or other establishments and for matters connected therewith.

Applicability
1. Applicability The Act is applicable to:

Every factory, mine, oilfield, plantation, port and railway companies; Every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a state, in which 10 or more persons are employed or were employed on any day of the preceding 12 months; To every motor transport undertaking, in which 10 or more persons are employed or were employed on any day of the preceding 12 months; Such other establishments or class of establishments, in which 10 or more employees are employed or were employed on any day of the preceding 12 months, as the Central Government may, by notification, specify in this behalf.

2.

3.

4.

Definitions
Completed Year of Service

The term completed year of service means continuous service for one year. An employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted (Continuous) service, including service which may be interrupted (Episodic) on account of sickness, accident, leave, absence from duty without leave.
Not due to any fault of the the employee like strike, lay-off, lock out, cessation of work

Employee
An employee is a person (other than apprentice) employed on wages (no wage ceiling or Upper limit) in any establishment, factory, mine, oilfield, plantation, railway company or shop, to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work, where the terms of such employment are express or implied, and includes any such person, who is employed in a managerial or administrative capacity, but does not include any person who hold a civil post under the Central Government or a State Government, or who is subject to the Air Force Act, 1950; the Army Act, 1950 or the Navy Act, 1957.

Wages and Retirement


Wages The term wages under the Act means all emoluments which are earned by an employee while on duty or on leave, in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes overtime wages and any other allowance. Retirement The term retirement has been defined under the Act as the termination of the service of an employee other than on superannuation. Superannuation means the attainment of such age by the employee as is fixed in the contract or conditions of service as the age on the attainment of which he has to leave the employment where there is no such provision, then attainment of the age of 58 years by the employee.

Payment of Gratuity, Forfeiture


Payment of Gratuity

Gratuity is payable to an employee on the termination of his employment after his continuous service for not less than 5 years - on his superannuation; or on his retirement or resignation; or on his death or disablement due to accident or disease. The amount of gratuity payable to an employee is not to exceed rupees three lakhs and fifty thousand. The right of employees to receive better terms of gratuity under any award or agreement or contract with the employer is not taken away by this Act. Forfeiture (Penalty,) If the services of an employee have been terminated for any act of willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, his gratuity can be forfeited to the extent of the damage or loss so caused to the employer. The gratuity payable to an employee can be wholly forfeited, if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence or an offence involving moral turpitude committed by him in the course of his employment.

Settlement of Claims, Offences and Penalties


Settlement of Claims

The employee and the employer or any other person raising the dispute regarding the amount of gratuity, may make an application to the controlling authority to decide the dispute. No appeal by an employer shall be admitted, unless the employer produces a certificate of the controlling authority to the effect that he has deposited with the controlling authority an amount equal to the amount of gratuity required to be deposited or deposits with the appellate authority such amount. Section 8 stipulates that an aggrieved employee can file an application to the controlling authority for recovery of the amount of gratuity. Offences and Penalties Section 9 declares certain acts as offences and prescribes penalties for them. Whoever, for the purpose of avoiding any payment, makes any false statement or false representation, is punishable with imprisonment up to 6 months and/or fined up to Rs.10,000. No court shall take cognizance of any offence punishable under this Act unless a complaint is made by or under the authority of the appropriate government

Simple Interpretation & Updation of Gratuity Based on Act

What is Gratuity?

Conditions of Entitlement Nomination Amount of Gratuity Deductions Permissible from Gratuity Intimation of Gratuity becoming Payable Employees Right to Demand for Gratuity (Rule7) Mode or Payment Time-Limit for Payment (Sec.7) Settlement of Disputes Employers to obtain Compulsory Insurance

Offences and Penalties: The penalties leviable in respect of the various offences under the Act are as follows:

OFFENCE
1.

PENALTY

Making a false statement or false Imprisonment up to 6 months or fine up to representation to avoid any payment Rs.10,000 or both under the Act

2. Contravention or non-compliance of Imprisonment up to one year or fine up to any provision of the Act or the Rules Rs.20,000 or both (minimum imprisonment for 3 months and fine up to Rs.10,000) 3. Non-payment of any gratuity payable Imprisonment up to two years (minimum 6 under the Act months) or fine up to Rs.20,000 (minimum Rs.10,000) or both Failure to make payment by way of Fine up to Rs.10,000 and Rs.1,000 for each premium for compulsory insurance u/s day during which the offence continues. 4A(1) or by way of contribution to an

4.

Object: It is an Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, and shops or other establishments.

Applicability: Any Employer of the above noted establishments where 10 or more persons are employed or were employed on any day of the preceding 12 months is liable to pay gratuity to its employees. Once the Act becomes applicable, it continues even if the number of employees falls below ten. Entitlement: Gratuity is payable to an employee (nominee - in case of death of employee) who has rendered continuous service of five years or more on his termination of employment, superannuation, retirement or resignation. Completion of continuous service of five years is not necessary where the termination of employment is due to death of disablement.

Calculation: W x Y x 15/26 where W = Last Wage drawn i.e., basic + DA Y = number of completed years of continuous service (six months or less to be ignored and more than six months to be counted as full year. 15 = 15 days salary 26 = No. of working days in a month.
Maximum Limit: Rs.3.5 lacs. (w.e.f 24-09-1997) Time Limit for application to employer: Employee has to make an application in Form-I to his employer within 30 days from the date of gratuity becomes payable. To calculate the gratuity: it has the formula

Ex. Number of yrs of service x Last salary drawn (Basic+D.A) X 15 26


This is the formula to calculate the gratuity.

Thank you

The Payment of Bonus Act, 1965


Payment of bonus finds justification on the ground that the workers should have a share in the prosperity of the concern for which they have made their contribution. The Bonus Commission rejected the argument that the payment of bonus is meant to fill up the gap that is in existence between the actual and the living wages though in the process of sharing the prosperity the gap is narrowed down or closed. It was not felt appropriate by the Commission that the amount of available surplus to be set apart for the purpose of payment of bonus should be linked with the wages level for that would introduce uncertainty and there are in existence wage boards for different industries with the object to reduce disparity(Difference) in the wages prevailing in different industries.
Payment of bonus is not the product of generosity (Kindness)of the employer but is one paid in the name of industrial peace and to make available to every employee a living wage, which more often is more than the actual wages.

Definitions In this Act, unless the context otherwise requires:


i.

1. accounting year means in relation to a corporation, the year ending on the day on which the books and accounts of the corporation are to be closed and balanced; in relation to a company, the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not;

ii.

4. allocable surplus means in relation to an employer, being a company (other than a banking company) which has not made the arrangements prescribed under the Income Tax Act for the declaration and payment within India of the dividends payable out of its profits in accordance with the provisions of section 194 of that Act, sixty-seven per cent of the available surplus in an accounting year; (in other case 60% available surplus)

6. available surplus means the available surplus computed (Calculate) under section 5; 12. direct tax meansi. ii. iii. iv. v.

any tax chargeable underthe Income-tax Act; the Super Profits Tax Act, 1963 (14 of 1963); the Companies (Profits) Surtax Act, 1964 (7 of 1964); the agricultural income-tax law; and

13. employee means any person (other than an apprentice) employed on a salary or wage not exceeding three thousand and five hundred rupees per month in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied;

14. employer includes in relation to an establishment which is a factory, the owner or occupier of the factory, including the agent of such owner or occupier, the legal

representative of a deceased (Dead) owner or occupier and where a


person has been named as a manager of the factory under clause (f) of subsection (I) of section 7 of the Factories Act, 1948 (63 of 1948); the person so named; 21. salary or wage means all remuneration (other than remuneration in respect of over-time work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment and includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living).

Establishments to Include Departments, Undertakings and Branches Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act. Computation of Gross Profits The gross profits derived by an employer from an establishment in respect of the accounting year shall a) in the case of a banking company, be calculated in the manner specified in the First Schedule; b) in any other case, be calculated in the manner specified in the Second Schedule. Computation Available Surplus The available surplus in respect of any accounting year shall be the gross profits for that year after deducting there from the sums referred to in section 6;

Sums Deductible from Gross Profits any amount by way of depreciation admissible in accordance with the provisions of sub-section (1) of section 32 of the Income-tax Act, or in accordance with the provisions of the agricultural income-tax law, as the case may be; Provided that where an employer has been paying bonus to his employees under a settlement or an award or agreement made before the 29th May 1965, and subsisting on that date after deducing from the gross profits notional normal depreciation, then, the amount of depreciation to be deducted under this clause shall, at the option of such employer (such option to be exercised once, and within one year from that date) continue, to be such notional normal depreciation; Calculation of Direct tax Payable by the Employer Any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year.

Eligibility for Bonus Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year. Disqualification for Bonus Notwithstanding anything contained in this Act, an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for: a) fraud; or b) riotous or violent behaviour while on the premises of the establishment; or c) theft, misappropriation or sabotage of any property of the establishment. Payment of Minimum Bonus Subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of the accounting year commencing on any day in the year 1979 and in respect of every subsequent accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year.

Payment of Maximum Bonus Where in respect of any accounting year referred to in section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year, subject to a maximum of twenty per cent of such salary or wage. Time-limit Payment or Bonus All amounts payable to an employee by way of bonus under this Act shall be paid in cash by his employer: a) where there is a dispute regarding payment of bonus pending before any authority under section 22, within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute; b) in any other case, within a period of eight months from the close of the accounting year;

Set on and Set off (Sec. 15, Payment of Bonus Act)

If in an accounting year, the allocable surplus exceeds the amount of


maximum bonus payable, then such excess shall be carried forward for being SET ON in the succeeding four accounting years. The amount to be carried forward should not exceed 20% of salary/wages for that accounting year. If there is no allocable surplus or if the allocable surplus falls short of the minimum bonus payable, then such deficiency be met out of the amount brought forward for being SET ON from the previous accounting year, if any. If there is still any deficiency, then such amount be carried forward for

being SET OFF in the succeeding four accounting years.


While calculating bonus for the succeeding accounting years, the amount of set on or set off carried forward from the earliest accounting

year shall first be taken into account.

Bonus Linked with Production/Productivity Where the employees enter into an agreement or settlement with their employer for payment of an annual bonus linked with production or productivity, in lieu of bonus based on profits, they shall be entitled to receive bonus due to them under such agreement or settlement, subject to a minimum of 8.33% and a maximum of 20% of the salary or wages earned by them during the relevant accounting year. Contracting Out is Void All contracts or agreements depriving the employees of their right to receive minimum bonus, shall be void and not enforceable (Sec.31A, Payment of Bonus Act). Bonus in case of New Establishments (Sec. 16, Payment of Bonus Act) Newly set up establishments are exempted from the liability to pay bonus during the initial period. In the first 5 accounting years following the year in which the employer begins to sell his goods or render services, bonus is payable only in respect of that accounting year in which the employer derives profits

Offences and Penalties (Sec. 28, Payment of Bonus Act)

The penalties leviable in respect of the various offences under the Payment of Bonus Act are as follows:
Offence
1. Contravention

Penalty
Imprisonment up to 6 months or fine up to

of the provisions of the

Actor Rules

Rs. 1000 or both


2. Failure to comply with the directions or Requisitions made As above