Gratuity under new labour code
Gratuity Under New Labour Code: Key Changes You Should Know
In this post, we’ll look at the new gratuity rules under the Labour Code and how they affect employees and employers.
Let’s look at each section in detail:
What is Gratuity?
Gratuity is a one-time payment that an employer gives to an employee to thank them for their long and loyal service.
Earlier, it was given only after completing 5 years of continuous service and was usually awarded at the time of retirement, resignation, or termination.
But with the new labour rules, gratuity may be allowed even after one year of service in some cases, especially for employees working on fixed-term contracts.
Key Change: Gratuity After 1 Year Under New Labour Code
The main point is that the one-year eligibility rule for gratuity applies specifically to Fixed-Term Employees (FTEs).
Here is a breakdown of what this key change means:
|
Employee Type |
Old Rule (Under Payment of Gratuity Act, 1972) |
New Rule (Under New Labour Codes) |
|
Fixed-Term Employees (FTEs) |
Not explicitly covered or generally required 5 years of continuous service. |
Eligible for gratuity after just 1 year (or 240 days) of continuous service. |
|
Permanent/Regular Employees |
Mandatory 5 years of continuous service. |
The 5-year requirement for continuous service generally remains. |
Benefits for Fixed-Term Employees
1. Shorter waiting period
Now, fixed-term employees can qualify for gratuity after just one year of service, provided they complete 240 working days in that year. Earlier, they had to wait for five long years like permanent staff.
2. Same treatment as permanent employees
The new rules officially recognise fixed-term employment. It clearly says that FTEs should receive the same benefits as regular staff like paid leave, medical cover, social security and now easier access to gratuity.
3. Gratuity on pro-rata basis
Once the contract period ends, gratuity will be paid based on the actual duration of service. But this applies only if the employee has completed a minimum one year of continuous service.
Redefined “Wages” Impact on Gratuity
The definition of “wages” has been expanded to include additional components notably, gratuity itself will now count for the purposes of computing wages under the Act.
“’Wages’ now include basic pay, dearness allowance, and retaining allowance; 50% of the total salary (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits,” stated the press release.
In many companies before, the basic salary was kept very low. Sometimes it was only 25-30% of the total CTC. Since gratuity is calculated on basic pay plus dearness allowance, keeping the basic salary low automatically reduces the gratuity an employee receives.
Under the new Code on Wages, the components counted as wages (basic pay, dearness allowance and retaining allowance) must make up at least 50 percent of the total salary. If these components are less than 50 percent, then the difference has to be added back for statutory calculations like gratuity.
Because of this rule, the wage base has increased for many employees. As a result, the gratuity amount will be higher at the time of retirement or when the employee leaves. This makes the benefit more fair and realistic as it is calculated on a proper portion of the salary.
Rs 20 lakh tax-free gratuity limit retained
The tax-free limit for gratuity is still fixed at Rs 20 lakh. This applies to all organisations that fall under the gratuity law. It is especially helpful for employees who have worked for many years and are close to retirement.
The Rs 20 lakh limit is simply the maximum amount you can receive as gratuity without paying tax on it. This limit was earlier Rs 10 lakh and was increased in 2018. If your gratuity amount goes above Rs 20 lakh, the extra amount will be added to your taxable income and taxed as per your income tax slab.
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