Law and You > Labour Laws > The Code on Social Security, 2020 > Settlement of Claim of Gratuity Under the Social Security Code, 2020 (Ss. 56 to 58)
A gratuity is a form of financial compensation given to employees by an organisation to express their gratitude for the work done. It is a form of acknowledgement of their efforts and contributions to the company’s growth and development. The amount is usually calculated based on the employee’s service tenure and last drawn salary. It serves as a morale booster for employees, recognising their hard work and dedication towards the company. The provisions about Gratuity under the Social Security Code, 2020 provides for the appointment of controlling authorities to settle disputes between employers and employees regarding gratuity payments. Gratuity is usually given to employees who have worked for the company for continuous five years minimum. Employers must obtain insurance coverage for their gratuity liabilities, and failure to comply with the Act can result in penalties and legal action. Chapter V of the Social Security Code, 2020 containing Sections 53 to 58 deals with Gratuity. In this article, let us understand the procedure of settlement of claim of gratuity under the Code. Section 56 of the Social Security Code, 2020 deals with settlement of claim of gratuity and also gives procedure of settlement of gratuity.
The settlement of claim of gratuity is a critical aspect of employee compensation and serves as a financial benefit for employees upon the conclusion of their employment. It is governed by specific legal frameworks that ensure fair and timely payment, and both employers and employees should be well-informed about their rights and obligations to avoid disputes and ensure compliance with the law. To understand these provisions we should go through some important definitions viz: appropriate government and competent authority.
Appropriate Government:
According to Section 2(3) of the Social Security Code, 2020 “appropriate Government” means—
(a) in relation to, an establishment carried on by or under the authority of the Central Government or concerning any such controlled industry as may be specified by notification in this behalf, by the Central Government or the establishment of railways including metro railways, mines, oil field, major ports, air transport service, telecommunication, banking and insurance company or a corporation or other authority established by a Central Act or the central public sector undertaking or subsidiary companies set up by the central public sector undertakings, subsidiary companies set up by the principal undertakings or autonomous bodies owned or controlled by the Central Government, including establishment of contractors for the purposes of such establishment, corporation or other authority, central public sector undertakings, subsidiary companies or autonomous bodies or any company in which not less than fifty-one per cent. of the paid up share capital is held by the Central Government, as the case may be, or in relation to an establishment having departments or branches in more than one State, as the case may be, the Central Government; and
(b) in relation to any other establishment, the State Government.
Explanation 1.—For the purposes of this clause, the expression “metro railway” means the metro railway as defined in sub-clause (i) of clause (1) of section 2 of the Metro Railways (Operation and Maintenance ) Act, 2002 (60 of 2002).
Explanation 2.—For the purposes of this clause, the Central Government shall continue to be the appropriate Government for the central public sector undertakings even if the holding of the Central Government reduces to less than fifty per cent equity in that public sector undertaking after the commencement of this Code.
Competent Authority:
According to Section 58(1) of the Code of Social Security, 2020 the appropriate Government may, by notification, appoint any officer of that Government having such qualifications and experience as may be prescribed by that Government to be a competent authority for implementation of any provision of this Chapter (Chapter V of the Social Security Code, 2020) for such area as may be specified in the notification.
According to Section 58(2) of the Code of Social Security, 2020 where more than one competent authority has been appointed for any area, the appropriate Government may, by general or special order, regulate the distribution of business among them.
According to Section 58(3) of the Code of Social Security, 2020 any competent authority may, for the purpose of deciding any matter referred to him for decision under this Chapter, choose one or more persons possessing special knowledge of any matter relevant to the matter under reference to assist him in holding the inquiry relating thereto.
Power of Competent Authority:
According to Section 56(6) of the Code of Social Security, 2020 for the purpose of conducting an inquiry under sub-section (5), the competent authority shall have the same powers as are vested in a court, while trying a suit, under the Code of Civil Procedure, 1908 (5 of 1908), in respect of the following matters, namely:—
(a) enforcing the attendance of any person or examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses.
Settlement of Claim of Gratuity:
Section 56 of the Social Security Code, 2020 deals with the settlement of claim of gratuity.
Application for Payment of Gratuity:
According to Section 56(1) of the Code of Social Security, 2020 a person who is eligible for payment of gratuity under this Chapter or any person authorised, in writing, to act on his behalf shall send a written application to the employer, within such time and in such form, as may be prescribed by the appropriate Government, for payment of such gratuity.
A person who is entitled to gratuity has to apply himself/herself or, through an authorised person to the employer for gratuity within the prescribed time. Even if the application is made after the prescribed time, the employer has to consider the same.
Duty of Employer:
According to Section 56(2) of the Code of Social Security, 2020 as soon as gratuity becomes payable, the employer shall, whether an application referred to in sub section (1) has been made or not, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable and also to the competent authority specifying the amount of gratuity so determined.
According to Section 56(3) of the Code of Social Security, 2020 the employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
The employer has to give notice to the person entitled to gratuity and to the controlling authority immediately after it became payable, specifying the amount of gratuity, and thereafter make arrangements for its payment within thirty days from the date it becomes payable to the person to whom the gratuity is payable.
Failure to Pay Gratuity in Specified Time:
According to Section 56(4) of the Code of Social Security, 2020 if the amount of gratuity payable under sub-section (3) is not paid by the employer within the period specified in sub-section (3), the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long term deposits.
In Case of Fault of the Employee:
Proviso attached to Section 56(4) of the Code of Social Security, 2020 lays down that no such interest shall be payable if the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the competent authority for the delayed payment on this ground.
Dispute Related to Gratuity:
According to Section 56(5)(a) of the Code of Social Security, 2020 if there is any dispute as to the amount of gratuity payable to an employee under this Chapter or as to the admissibility of any claim of, or in relation to, an employee for payment of gratuity, or as to the person entitled to receive the gratuity, the employer shall deposit with the competent authority such amount as he admits to be payable by him as gratuity.
Application to the Controlling Authority
According to Section 56(5)(b) of the Code of Social Security, 2020 where there is a dispute with regard to any matter or matters specified in clause (a), the employer or employee or any other person raising the dispute may make an application to the competent authority in the form prescribed by the appropriate Government for deciding the dispute.
Determination of Matter and Payment of Gratuity by Controller Authority
- According to Section 56(5)(c) of the Code of Social Security, 2020 the competent authority shall, after due inquiry and after giving the parties to the dispute a reasonable opportunity of being heard, determine the matter or matters in dispute and if, as a result of such inquiry any amount is found to be payable to the employee, the competent authority shall direct the employer to pay such amount or, as the case may be, such amount as reduced by the amount already deposited by the employer.
- According to Section 56(5)(d) of the Code of Social Security, 2020 The competent authority shall pay the amount deposited, including the excess amount, if any, deposited by the employer, to the person entitled thereto.
- According to Section 56(5)(e) of the Code of Social Security, 2020 as soon as may be after a deposit is made under clause (a), the competent authority shall pay the amount of the deposit—
(i) to the applicant where he is the employee; or
(ii) where the applicant is not the employee, to the nominee or, as the case may be, the guardian of such nominee or heir of the employee if the competent authority is satisfied that there is no dispute as to the right of the applicant to receive the amount of gratuity.
Power of Competent Authority:
According to Section 56(6) of the Code of Social Security, 2020 for the purpose of conducting an inquiry under sub-section (5), the competent authority shall have the same powers as are vested in a court, while trying a suit, under the Code of Civil Procedure, 1908 (5 of 1908), in respect of the following matters, namely:—
(a) enforcing the attendance of any person or examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses.
Judicial Proceeding
According to Section 56(7) of the Code of Social Security, 2020 any inquiry under this section shall be a judicial proceeding within the meaning of section 229, section 267 and for the purpose of section 233 of the Bharatiya Nyaya Sanhita, 2023 (45 of 2023).
Appeal:
According to Section 56(8) of the Code of Social Security, 2020 any person aggrieved by an order under sub-section (5) may, within sixty days from the date of the receipt of the order, prefer an appeal to the appropriate Government or such other authority as may be specified by the appropriate Government in this behalf:
The first proviso attached to Section 56(8) of the Code of Social Security, 2020 lays down that the appropriate Government or the appellate authority, as the case may be, may, if it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal within the said period of sixty days, extend the said period by a further period of sixty days:
The second proviso attached to Section 56(8) of the Code of Social Security, 2020 further lays down no appeal by an employer shall be admitted unless at the time of preferring the appeal, the appellant either produces a certificate of the competent authority to the effect that the appellant has deposited with him an amount equal to the amount of gratuity required to be deposited under sub section (5), or deposits with the appellate authority such amount.
According to Section 56(9) of the Code of Social Security, 2020 the appropriate Government or the appellate authority, as the case may be, may, after giving the parties to the appeal a reasonable opportunity of being heard, confirm, modify, or reverse the decision of the competent authority.
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 and 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 56(8) stipulates that an aggrieved employee can file an application to the controlling authority for recovery of the amount of gratuity. The controlling, authority will issue a certificate to the collector for recovery of that amount. The collector shall recover the amount, together, with compound interest, at the rate of nine per cent per annum from the date of expiry of the prescribed time as arrears of land revenue, and pay the same to the person entitled to it.
Offences and Penalty:
First Time Offender:
According to Section 133 of the Social Security, Code, 2020 if employer fails to pay any amount of gratuity to which an employee is entitled under this Code; then he will be punished with imprisonment for a term which may extend to one year or with fine which may extend to fifty thousand rupees, or with both.
Repeat Offender:
According to Section 134 of the Social Security, Code, 2020 where such second or subsequent offence is for failure by the employer to pay any contribution, charges, cess, maternity benefit, gratuity or compensation which under this Code he is liable to pay, he shall, for such second or subsequent offence, be punishable with imprisonment for a term which may extend to three years but which shall not be less than two years and shall also be liable to fine of three lakh rupees.
Offences by Companies and Penalty Thereof:
According to Section 135(1) of the Social Security, Code, 2020 where an offence under this Chapter has been committed by a company, every person who, at the time the offence was committed, was directly in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
According to Section 135(2) of the Social Security, Code, 2020 notwithstanding anything contained in sub-section (1), where an offence has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, secretary or other officer of the company, such director, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation:—For the purposes of this section,— (a) “company” means any body corporate, and includes a firm or other association of individuals; and (b) “Director”, in relation to a firm, means a partner in the firm.
Note:
Gratuity amount cannot be attached in execution of any decree or order of any civil, revenue or criminal court. Notwithstanding anything contained in any other enactment, instrument or contract, the provisions of this Act would prevail. The Act confers power on the appropriate government to make rules for the purpose of carrying out the provisions of this Act. The Act also empowers the appropriate government to appoint inspectors with various powers to inspect documents and ensure payment of gratuity to the employees as prescribed under the Act.
Taxability of Gratuity Amount:
The income tax exemptions on gratuity can be categorised as follows:
Exemptions on Gratuity Received by Government Sector Employees:
The gratuity given to employees working in a government sector upon their termination, retirement or superannuation are fully exempted from paying tax. It is applicable to employees of the central government, state government, defence sector, members of civil services and other local authorities.
Exemptions on Gratuity Received by Private Sector Employees:
The income tax exemption on gratuity given to employees working in the private sector depends on whether they are covered under the Code or not.
When private sector employees are covered under the Code:
The income tax exemption on gratuity received is the least of the following three:
- Last salary (basic + DA)* number of years of employment* 15/26;
- Rs.20 lakhs;
- Gratuity actually received
When private sector employees are not covered under the Act:
The income tax exemption on gratuity received is the least of the following three:
- Last 10 month’s average salary (basic + DA)* number of years of employment* 1/2;
- Rs.20 lakhs;
- Gratuity actually received
Conclusion:
The settlement of claim of gratuity typically marks the final compensation that an employer provides to an employee upon the termination of employment, whether through retirement, resignation, or other reasons. Employees usually become eligible for gratuity if they have completed a minimum of 5 years of continuous service with the same employer. Gratuity is often calculated based on the employee’s last drawn salary and the number of years of service. A common formula is:
Gratuity = Last Drawn Salary × Number of Years of Continuous Service × 15/26
The settlement of claim of gratuity should be made promptly, usually within 30 days from the date it becomes payable. If there is any delay for settlement of claim of gratuity beyond this period, the employer may be required to pay interest on the amount due. Gratuity payments up to a certain limit are tax-exempt. Any amount above this limit may be subject to tax. In case of disputes regarding the amount or payment of gratuity, employees can approach competent authority to seek redressal. Employers are required to comply with the Code and regulations governing the settlement of claim of gratuity. Non-compliance can result in legal penalties and fines.