Employees welcome new Gratuity Act

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The Indian government has finally decided to increase the limit of gratuity to Rs1 million (US$22,500) from the existing limit of Rs350,000. While the notification for change to the Payment of Gratuity Act, 1972 (POGA), is still awaited this announcement has already brought cheers to the large employee community in the country. As a result of this decision, an employer will be required to pay up to Rs1 million to eligible employees, upon retirement, resignation or termination of employment.

Provident_fundsThe POGA applies to all factories and to establishments that have at least 10 employees. It states that every employee who has served for a continuous period of at least five years (except in certain cases) is eligible to receive gratuity from his employer, upon termination of employment. This is to be at the rate of 15 days’ salary for every completed year of service or part thereof in excess of six months. In order to limit the employer’s liability, the gratuity amount had been capped at Rs350,000. However, employees serving the central and state government were eligible to receive gratuity up to Rs1 million.

According to Indian accounting standards, an employer can pay gratuity through a trust fund created for the purpose or alternately arrangements can be made with an insurance company such as the Life Insurance Corporation of India or any other prescribed insurer, so that annual contributions towards gratuity can be made each year.

This increase to the limit of gratuity seems to stem from talks held between government officials and state labour authorities. It will bridge inequalities between government employees and those working in the private sector and benefit high income earners as the current gratuity limit of Rs350,000 had not kept pace with escalating salaries. In addition, the POGA needed to keep abreast of the steady increase in the eligibility limits (in terms of salaries) under some of the other federal labour laws. This increase may also be an incentive for junior and mid-level employees to stay longer with one employer.

However, the higher limit will significantly increase the gratuity obligations of private-sector companies, which are predominantly small to mid-size, and they may need to rework their financials. Also, given that hiring conditions have significantly revived in several sectors, senior-level employees (i.e. those who have already completed five years and reached the new gratuity ceiling) may prefer to cash in on the higher limit by considering alternative employment opportunities.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at [email protected] Readers should not act on the basis of this information without seeking professional legal advice.