Course : Commerce

Paper : Industrial Laws

Lesson : Gratuity and Bonus
Lesson Developer : Ms. Ritika Ahuja, Ms. Deepika Dewan
Department/College : SRCC, Bharati College,
University of Delhi University of Delhi
Reviewers Name : Dr. Gurmeet Kaur
Fellow in Commerce, ILLL
Associate Professor,
Daulat Ram College,
University of Delhi

1
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 Gratuity and Bonus

Lesson: Gratuity and Bonus

Table of Contents:
1: Learning Outcomes
A. The Payment of Bonus Act, 1965
2: Introduction
3: Key Definitions
4: Eligibility and Disqualification of Bonus
5: Establishment under Section 3
6: Computation of Bonus under Section 3
7: Payment of Minimum and Maximum Bonus
8: Working Day and Proportionate Reduction in Bonus
9: Set-on and Set-off on Allocable Surplus
10: Miscellaneous
11: Recovery of Bonus from Employee under Section 21
B. Payment of Gratuity Act, 1972
1: Introduction to the Payment of Gratuity Act, 1972
2: Meaning of Gratuity
3: Commencement of the Act and its Applicability
4: Person Eligible to Receive Gratuity and Exemptions
5: Objectives of the Act
6: Key Definitions
7: Payment of Gratuity
8: Amount of Gratuity
9: Forfeiture of Gratuity
10: Provisions Relating to Disputes
11: Recovery of Gratuity
12: Penalties
Summary
Exercises
Glossary
References
Quiz

1. Learning Outcomes:
After you have read this chapter, you should be able to:

understand the applicability and non-applicability of Bonus and Gratuity acts,

compute amount of profits for the determination of Bonus and Gratuity,

calculate maximum and minimum amount of bonus,

comprehend the provisions of Bonus Act,

understand the applicability of the Bonus and Gratuity act,

appreciate the rules and implications of the Bonus and Gratuity acts.

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 Gratuity and Bonus

A. The Payment of Bonus Act, 1965

2. Introduction:
The Payment of Bonus Act came in to force in the year 1965 with the aim to reward
employees for their good work and dedication towards an organization. It was an
initiative taken to make sure that prosperity of the organization, which is reflected in
the profit earned by the organization, is shared with the people who are actually the
ones who worked hard to achieve this prosperity.
The Payment of Bonus Act is designed to achieve following objectives:
1. To create a statutory liability of organization to pay bonus.
2. To create a standard formula for the calculation of bonus.
3. To determine standard minimum & maximum percentage of bonus.
4. To create redressal platform for the employees.
Applicability:
The Payment of Bonus Act is applicable under following conditions:
Factories where 10 or more persons are employed with the aid of power;
Establishment where 20 or more persons are employees without aid of power;

3. Key Definitions:
1. "Accounting Year" has different meanings for different organizations.
For corporations, Accounting Year refers to a year ending on the day on which the
Books and Accounts of the Corporation are to be closed and balanced.
Figure 1: Accounting Year for Corporation

Accounting For Day on which Accounts are

Year Corporation closed and balanced

For Companies, Accounting Year refers to a period, for which Profit and Loss Statement
of company is prepared and presented in the Annual General Meeting, whether that
period is a year or not.
Figure 2: Accounting Year for Companies

For which Profit and Loss Whether that

Accounting For
Statement was laid before period is a
Year Companies
annual general meeting year or not

For others, Accounting Year refers to one of the following:

Year commencing on 1st April
OR
If accounts of any organization are maintained by the employer himself and he closes
and balances the Accounts on any day other than 31 st March, then it is at the option
of employer to consider as an Accounting Year, that day on which he is closing the
Accounts.

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 Gratuity and Bonus

Figure 3: Accounting Year for Others

Allocable Surplus under Section 2(4):

Allocable Surplus refers to different meanings in different situations:
For employer, being a company other than Banking Company, where no adjustments
have been made in relation to Income Tax Act, for the declaration of payment of
bonus out of profit, within India, in accordance with the provisions of Section 194 of
the Act, allocable surplus is 67% of the available surplus in an accounting year.
For others, allocable surplus is 60% of available surplus.
2. Appropriate Government Section 2(5):
For the Payment of Bonus Act, Appropriate Government refers to Government of the
State in which the establishment is situated, whose employees are entitled to receive
bonus.
But in relation to an establishment, for which Appropriate Government under Industrial
Dispute Act, 1947 is Central Government, Appropriate Government is Central
Government.
3. Available Surplus: Section 2(6)
In an Accounting Year, Available Surplus refers to following:
Available Surplus = Gross Profit before any charge
- prior changes as per Section 6 like depreciation, rebate, etc.
- difference between amount of direct taxes of the preceding year
and immediate year

Value Addition 1: Did You Know?

Calculation of Allocable Surplus
As per Section 5, allocable surplus can be calculated as follows:
Gross Profit
Less: Depreciation
Investment Allowance
- Development Allowance
- Direct Taxes
- Any other sum specified in respect of employer in the 3 rd
Schedule
- Reserve

4. Employee: Section 2(13)

Employee refers to any person other than apprentice employed on salary or wage not
exceeding 10,000 per month belonging to any industry whether skilled or unskilled,
doing manual, supervisory, managerial, administrative, technical or clerical work,

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 Gratuity and Bonus

whether terms and conditions of employment are expressed or implied.

Figure 5: Employee under Section 2(13)

Salary or Terms and

Skilled or
Employee wage less conditions of
unskilled doing
Other than than employment
manual technical
Apprentice 10,000 per expressed or
month
work etc. not

5. Employer: Section 2(14)

In case of factory, employer refers to the owner or occupier of the factory. It also
includes the agent of such owner or legal representative of a deceased owner or any
person who has been designated as manager of the factory as per clause (f) of Section
7(1) of the Factories Act, 1948.
In case of establishments, other than factories, employer refers to the person or
authority which controls the working of establishment and working of establishment is
entrusted to a manager, managing director or managing agent.
6. Establishment:
Concrete definition of establishment is not given under Payment of Bonus Act. But area
of establishment includes departments, undertakings and branches, etc.
Establishment has different meanings for public sector and private sector.
In public sector, as per Section 2 (16), establishment refers to an establishment
owned, controlled or managed by Government or by a corporation in which less than
40% of its capital controlled by Government, RBI or a corporation owned by the
Government or RBI.
In private sector, as per Section 2 (15), establishment refers to any establishment
other than establishment in the public sector.
7. Salary or Wage: Section 2(21)
Salary or wages refer to remuneration received by the employee for the work done by
him for the establishments. Wages can be expressed in terms of money & includes
dearness allowance but does not include following:
Any other allowance, that employee may be receiving;
Value of perks, like, house accommodation, supply of light, water, medical
allowance, etc.;
Travelling Concession;
Contribution of employer and employee towards Provident Fund;
Retirement Benefits like, Gratuity;
Retrenchment Compensation;
Commission payable to employee;
Over Time Allowance.
In case, if employee is given the below mentioned allowances and perks in lieu of whole
or part of his salary, then, it is considered as a part of salary or wage of such an
employee. These allowances are:

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 Gratuity and Bonus

Food Allowance;
Free Food by the Employer;
Lay-off Compensation;
Dearness Allowance;
City Compensatory Allowance;
Retaining Allowance.

4. Eligibility and Disqualification of Bonus:

As per Section 8, an employee whose salary is up to Rs. 10,000 per month, whether
skilled or unskilled, doing manual, supervisory, administrative, technical or clerical
work is entitled to receive bonus, on the condition that he has worked for at least 30
working days in that said year.
Following employees are not eligible to receive any bonus under the Payment
of Bonus Act: (Section 32)
Employees of Indian Red Cross Society or any other institution of similar nature;
Employees working in any University or any other Educational Institution;
Employees of Reserve Bank of India;
Employees of NABARD (National Bank for Agriculture and Rural Development);
Employees of Financial Corporation;
Employees of IDBI (Industrial Development Bank of India);
Employees employed by institutions not established for the purpose of profit like
hospitals, Chamber of Commerce and other society or welfare institutions;
Employees working with contractors on building operations.
Following Employees are entitled to Receive Bonus under the Bonus Act:
Temporary Worker, according to his working days;
Seasonal labour is entitled to receive bonus on proportionate basis;
Part-time Employee is also entitled to receive bonus;
Retrenched employee is also eligible to receive bonus on the condition that he has
worked for minimum qualifying period;
Employee hired on the basis of probation is also entitled to receive bonus;
If a dismissed employee is reinstated with back wages then he is also entitled to
receive bonus;
Piece rated worker is also eligible to receive bonus.
An employee in the following cases is not entitled to bonus:
1. If he is an apprentice;
2. If he has been dismissed from his service on the grounds of misconduct.
Disqualification of Bonus: (Section 9)
Any employee, who is included under the following category, shall be disqualified from
receiving bonus under Payment of Bonus Act.
If an employee has been dismissed for fraud or riotous or violent behaviour;
If an employee has been dismissed against the charges of theft, misappropriation
of profit or sabotage of any property.

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 Gratuity and Bonus

Value Addition 2: Illustration

Disqualification of Bonus

Monthly wages of Mr. Y is Rs. 100 per month. Mr. Y is eligible to

receive bonus of Rs. 150 for an accounting year. But Mr. Y worked
only for 6 months in a year. So he is entitled to receive bonus only
for 6 months i.e. Rs. 75 as bonus.
Exception: If an employee willingly or due to his misconduct, does
not work on all the working days, in an accounting year, then the
calculation of bonus formula under Section 14 is applied. But, in a
situation, when an employee was ready and willing to work, but,,
because of some uncontrollable reason he was unable to work and
gain the eligibility under Section 8 then Section 14 cannot work as
an obstacle.

5. Establishments (Section 3):

As already discussed earlier, the area of establishment includes departments,
undertakings and branches, etc. It has different connotation for public sector and
private sector.
In public sector, it refers to an establishment owned, controlled or managed by
Government or by a corporation in which less than 40% of its capital controlled by
Government, RBI or a corporation owned by the Government or RBI. In private
sector, it refers to any establishment other than establishment in the public sector.
An establishment can be departments, undertakings or branches of undertakings
which may be situated at the same place or at different places. All departments or
undertakings or its branches should be treated as a part of same establishment for
the purpose of calculation of bonus.
For every accounting year, separate Balance Sheet and Profit and Loss Accounts are
prepared for any such department.

6. Computation of Bonus (Section 12):

As per Section 10:

If salary 3500 per Minimum 8.33% of Basic

month but 10,000:
Salary is payable to such
employee as bonus.
Maximum 20% of Basic
Salary is payable to such
employee as bonus.

6.1. Computation of Gross Profit (Section 4):

For the computation of Gross Profit, under the Payment of Bonus Act, two Schedules
have been provided.
Schedule 1 for Banking Companies;
Schedule 2 for Non-Banking Companies;

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 Gratuity and Bonus

Computation of Gross Profit:

Net Profit
Add: Deduct:

Income Tax; Capital Receipt and Capital Profit;

Provision related to bonus, depreciation
and Direct Taxes;
Amount paid for Approved Gratuity
Fund;
Amount paid to employees on their
retirement or termination;
Donations;
Annuity Due;
Capital Expenditure and Losses;
Profits and Receipts related to business
situated outside India;
Income from foreign concerns;
Other expenditure or losses;
Loss from a concern situated outside
India;
Proportionate administrative expenses of
foreign concerns;
Refund of any Direct Tax paid;

7. Payment of Minimum and Maximum Bonus:

Minimum Bonus (Section 10):
Amount of bonus, which is mandatory to be paid by an employer to employee, even in
the case of losses or when allocable surplus is zero during an accounting year called
Minimum Bonus.
The amount of Minimum Bonus is 8.33% of salary or wage, during an accounting year.
or
If working life of employee is below 15 years, then Rs. 60 and if working life is more
than 15 then Rs. 100.
The higher of the above two will be considered as a Minimum Bonus.
Maximum Bonus (Section 11):
In any accounting year, when amount of allocable surplus adjusted for set on and set
off amounts is greater than the amount of Minimum Bonus, then, employer shall pay
bonus in proportion to the salary or wages earned by the employee in the accounting
year, subject to maximum of 20% of salary or wage.
Value Addition 3: Did You Know?

Points to Remember for the Calculation of Bonus

For the calculation of Bonus, salary should consist of Basic Salary
and Dearness Allowance.
An employer is supposed to pay bonus in the year in which he has
earned profit, but, if in any year, employer has incurred losses,
employees can claim minimum amount of bonus from the
employer.
Employees hired on probationary, part time, contractual basis or
whose job are of permanent nature and withdrawing salary or
wage less than or equal to Rs. 10,000, with completed 30 working
days in an accounting year is eligible for bonus.

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 Gratuity and Bonus

8. Working Days and Proportionate Reduction in Bonus:

Working Days include following:
Days when employee has been laid off;
Days of leave with salary;
Days of absenteeism due to temporary disablement;
Days of maternity leave with salary or wage;
If an employee has not worked for all the working days, in that case, Rs.100 will be
given as minimum bonus or Rs. 60, if such bonus is greater than 8.33% of salary or
wage for the days he has worked, shall be reduced proportionately.

Value Addition 4: Illustration

Calculation of Working Days

Mr. Y has joined an organization as a temporary employee. He
worked for 2 months in the organization. Then, he was reinstated for
the remaining 10 months. Can he claim bonus?
Answer:
Yes, Mr. Y is eligible to claim bonus from the organization as he was
reinstated.

9. Set-on and Setoff Allocable Surplus (Section 15):

Set-On of Allocable Surplus:
In case of huge profits, if after paying the maximum bonus of 20% on wage or salary
to employee, any excess allocable surplus is available, then, the excess surplus should
be carried forward to the next following year, with the purpose to utilize the surplus as
surplus in case of shortage of allocable surplus in the coming years.
Set-Off of Allocable Surplus:
In case of losses, when no profits are there for the payment of minimum bonus of
8.33%, then, such deficiency should be adjusted in current year from the set-on
amount, which was carried forward, in case of, excess allocable surplus in the previous
year.
Following is the Method of Set-off of Available Surplus:
1. If, in any accounting year, the allocable surplus is greater than the amount of
maximum bonus which cannot be more than 20% of salary or wage of employee in an
accounting year, shall be carried forward for being set on in the succeeding
accounting year and so on up to and inclusive of the 4th accounting year.
This excess is to be utilized for the purpose of payment of bonus, in the manner
illustrated in the Fourth Schedule.
2. In an accounting year, if no surplus is available or allocable surplus is less than the
minimum bonus to be paid by the employer and no set-on amount is available which
could be utilized for the purpose of payment of bonus. In that case, amount of set off
to be carried forward should be calculated according to Schedule 4.
3. The calculation of bonus, for all cases, which are not covered by Sub-section (1) or
(2) is done according to Fourth Schedule of Bonus Act.

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 Gratuity and Bonus

4. Where in any accounting year, any amount has been carried forward and set on or
set off under this Section, then, in calculating bonus for the succeeding accounting
year, the amount of set on or set off carried forward from the earliest accounting year
shall first be taken into account [Section 15(4)].

10. Miscellaneous:
10.1. Adjustment of Customary or Interim Bonus (Section 17):
Any puja bonus or other customary bonus, paid by the employer can be deducted by
him from the bonus so paid to the employee under the Bonus Act. The employee is
entitled to receive only the balance.
10.2. Deductions of Certain Amount from Bonus Payable (Section 18):
As per Section 18, an employer can lawfully deduct the amount of loss from the
amount of bonus payable in an accounting year, if the same loss has been occurred
due to misconduct of the employee. In this case, the employee shall get only the
balance, if, any remains.
10.3 Time Limit for Payment of Bonus (Section 19):
Amount of bonus declared by employer shall be paid by employer within 8 months
from the closing of accounting year. The period of 8 months may be extended to 12
months, if required permission is received by appropriate authority or as specified by
appropriate Government. The employer is required to submit an application for the
grant of extension of days and need to give appropriate reasons for the same.
But, where there is a dispute regarding the payment of bonus pending before any
authority, the same must be paid within a month from the date on which the award
becomes enforceable or the settlement comes into operation, in respect of a dispute
mentioned under Section 22.

11. Recovery of Bonus from Employee (Section 21):

If an amount of bonus, is due to an employee from his employer, under a settlement
or an award or agreement and it is not paid. In such a case, following procedure may
be followed to recover the due bonus:
a. The employee may make an application for the recovery of the amount due to
him to the Appropriate Government;
b. The application can be made by any other person, authorized by the employee,
in writing to act on his behalf. It can be made even by his assignee or heirs when
the employee is dead;
c. The application is to be made within one year from the date on which the
bonus became due, but, it may be entertained even after the expiry of the period
of one year, only if the Appropriate Government is satisfied that there is sufficient
cause for not making the application by the applicant within the said period;
d. On receipt of the application, for the recovery of the bonus, a certificate shall be
issued by collector provided that Appropriate Government is satisfied with the
reasons for the due money;
e. Thereafter, Collector shall proceed to recover the amount of bonus in the same
manner as an arrear of land revenue.

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 Gratuity and Bonus

B. Introduction to Payment of Gratuity Act, 1972

1. Introduction to Introduction to Payment of Gratuity
Act, 1972:
Social Security of employees is an important concern for employees, especially in
countries which are industrializing in nature. There are certain social security
legislations which aim to provide social welfare to the employees at the time of their
retirement, resignation, death etc.
Provisions of these legislations help in improving the productivity of employees. They
can work with certain level of mental satisfaction that organization will look after them
at the time of retirement... it brings rest, mental peace thereby improving overall
productivity which benefits both organization as well as their employees.
One of such social security legislation is Payment of Gratuity Act 1972.
The payment of gratuity act is a central law which aims to provide benefits to the
employees who have worked so hard the organization at the time of retirement. This
law came into force on 16th September 1972.
The act was passed by the government with a view to provide uniform pattern of
gratuity payment to the employees at the time of their leaving the organization. This
act aims to ensure uniformity among the payment pattern throughout the country.

2. Meaning of Gratuity:
Though the Act doesnt give a clear definition of gratuity but it can be clearly expressed
as:
A reward for the employees, who have worked so hard towards the organization for
years and years. Gratuity is paid to employees who have given long and meritorious
service to the organization throughout their lifetime.
It is reward given to them at the time of the retirement or superannuation or
termination or resignation.
Gratuity is a reward for their efficiency, dedication, commitment towards the
organization over number of years.

Value Addition 1: Did You Know?

Why Gratuity?

Gratuity is a reward for employees and aims to provide social

security to them at the time of retirement. Following link will help
you to know more about meaning of this act.

Source: http://www.lawctopus.com/academike/payment-gratuity/

3. Commencement of the Act and its Applicability:

A) Though the Payment of gratuity Bill was passed on 21 august 1972 but it officially
came into force on 16-sep-1972.
B) Various amendments have been made in this particular act as per changing
requirements over the years, recent being in 2010
C) As far as applicability of this act is concerned, it extends to whole of India, except to
Jammu and Kashmir as far as plantation or ports are concerned.

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 Gratuity and Bonus

D) Other than that according to Sec1(3) of this act applies to:

i) Every factory, mine, oilfield, plantation, port and railway company.
ii) Every shop or establishment which are governed shops and establishment act of
the state and in which employees of 10 or more persons on any day in
preceding 12 months.
iii) Any other establishment which employees or have employed 10 or more
employees in preceding 12 months as specified by the central government by
the notification in official gazette.
According to Sec1(3A) it is important to note that this act will continue to apply even if
employees working /worked in the organization falls below 10 or is less than 10.
It is important to note that this act is equally applicable towards all the employees
irrespective of their salary.

4. Person Eligible to Receive Gratuity and Exemptions:

Value Addition 2: Know More

Is teacher eligible for payment of gratuity?

Yes. Teacher is very much considered as an employee for the

payment of gratuity under Gratuity Act.

Source: http://www.moneycontrol.com/news/wire-news/teacher-
isemployeeentitled-to-gratuity-benefits-hc_675054.html

4.1 Who is Eligible to Receive Gratuity?

Following people are eligible to receive gratuity:
A. Person employed in the establishment and that establishment is covered under the
Act.
B. Person is employee under Sec 2 (e) of the Act.
C. Person is in continuous service for a minimum period of 5 years except in case of
death or disablement.
4.2 This Act is Not Applicable to:
i. Apprentices.
ii. Any person other than the one who holds civil position under the central
government or state government.

Value Addition 3: Video

Easy and Simple Video on the Act Covering All Aspects

Click on the link below to watch the video on payment of gratuity, its
importance and the act in very simplified language. It will a deep
inside into The Payment of Gratuity Act 1972.

Source: https://www.youtube.com/watch?v=wyiKRAhLFsU

5. Objectives of the Act:

The main objectives of this act can be briefly summed up as:
a. To provide social security to the employees working in organization at the time of
retirement.

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 Gratuity and Bonus

b. Help them financially at the time of retirement/death.

c. Providing them benefits for the dedicated service towards the organization.
d. To ensure justice with the employees as main aim of these objectives is to ensure
uniformity in payment at the time of retirement.
e. Lastly to provide financial support so as that they can work with mental rest and
feel committed towards the organization.

Value Addition 4: Activity

Interview
Interact with two employees who have just retired from their
organizations and collect details about their gratuity payment. And
then relate it with the various topics covered in this paper.

6. Key Definitions:
6.1: Appropriate Government:
According to the Sec 2(a), appropriate government is the central government for the
following organizations:
a) Establishment belonging to or under control of central government.
b) Establishment having branches in more than one state.
c) Establishment of factory belonging to or under the control of central government.
d) Establishment of major port, mine, oilfield or railway company.
For other organizations, appropriate government is the state government.
6.2: Completed Year of Service:
For the purpose of applicability of this act completed year of service stands for one
completed year.
6.3: Employee:
According to Sec2 (e) employee means person other than apprentice who is employed
on wages in an establishment where the terms of employment may be expressed or
implied working either in factory, establishment, ,mine, oilfield, plantation, port or
railway company shop or any establishment where such implies. Employee can be
employed in either managerial or in administrative capacity.
An important point here is that employee doesnt include person working in central
government or state government and is governed by any other act or by rules providing
for payment of gratuity.
6.4: Employer:
According to the Sec 2(f) employer means in relation to any establishment, factory or
mine, oilfield, plantation, port, railway company or shop:
A. Establishment belonging to or under control of central government or state
government, in that case a person or authority appointed by appropriate
government for supervision and control of employees is the employer or head of
ministry /department concerned where no person or authority has been
appointed.
B. Establishment belonging to or under the control of any local authority, employer
is the person appointed by such authority for supervision and control of

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 Gratuity and Bonus

employees or chief executive officer of the local authority where no person has
been so appointed.
C. In any other case person or authority having ultimate control over the affairs of
any establishment, factory mine, oil-field, plantation, port, railway company or
shop and where the said affairs are entrusted to any other person whether called
as manager, managing director or by any other name, such person.
6.5: Wages:
According to Sec 2 (s) wages means all the emoluments earned by employees when they
are on duty or when they leave the organization. It includes dearness allowance.
An important point to note here is that wages do not include Bonus, Commission, H.R.A.,
overtime wages or any other allowances.

Value Addition 5: Know More

Topic: 13 facts one should know about gratuity.
Following is the list of 13 facts one should bear in mind while
studying about the gratuity especially the gratuity act.

Source: http://sett.com/theorangeoctopus/13-facts-one-should-
know-about-gratuity-act-in-india

6.6: Continuous Services:

According to Sec 2(A) of the act, continuous service refers to uninterrupted
service, which may be interrupted because of sickness, accident, leave, absence
from duty without leave, strike, lockout etc are also counted in continuous service
provided it doesnt lead to cessation of work due to fault of employees,
interrupted service was rendered before or after the commencement of the act.
Where an employee who isnt employed in seasonal establishment and is not in
continuous service for 1 year or 6 months they will be counted ass in continuous
service for a period of one year when employee was employed below the ground
in a mine for not less than 190 days.
In other case it is 240 days.
In the above two cases: continuous service is taken as 1 year.
And for the period of 6 months it is 95 days i.e. when if employee was employed
below the ground in a mine.
For any other establishment it is taken as 120 days.
In case of employees working in seasonal establishment, employee shall be
considered in continuous service if they have worked for at least 75% of the
working days of the establishment.
6.7: Number of Days on Which Employee has Actually Worked Includes:
Day he has been laid off.
Day he has taken a leave i.e. paid leave.
It also includes day employee has been temporarily absent due o disablement
caused by the accident while working in establishment.
For female employees, maternity leave not exceeding 12 weeks is also
considered as in continues service.

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Value Addition 6: Did You Know?

Online available material of The Payment of Gratuity Act from
Gazette of India.

file:///C:/Users/admin/Downloads/ThePaymentofGratuityRules.pdf

7. Payment of Gratuity:
1. Gratuity is available to employees who have worked for minimum of 5 years in an
organization. Though this condition of five years is not applicable in case of death or
disablement caused while on duty.
2. So those who have serviced continuous service of five years are entitled to gratuity on
their superannuation or their resignation or retirement.
3. In case of death of employee, gratuity is payable to the nominee of employee. And if
no nominee is their then to their legal heir.

Value Addition 6: Did You Know?

Is Gratuity Payable at the time of death? Even if 5 years are not
completed?
Yes gratuity is payable to either the nominee or their legal heir if
death is caused while performing the duty even if 5 years are not
completed.

Source: file:///C:/Users/admin/Downloads/ThePaymentofGratuityRules.pdf

8. Amount of Gratuity:
It can be calculated as following:
Gratuity payable = Last drawn monthly wages*15/26
*number of completed years of service
Including part thereof which is in excess of 6 months.
It is important to note that the above formula applies to both employees working on
monthly rated as well as piece rated employees. But for piece rated employees their
daily wages are considered as average of total wages they have received for the period
of 3 months immediately preceding termination of his employment. For the employees
working in a seasonal establishment, gratuity payable to them is on the basis of rate of
seven days wages for every season. Lastly for the employees who are disabled and are
reappointed by the organization at the reduced wages, then for the period before
disablement their wages will be on the basis of wages last drawn and for the subsequent
period their reduced wages will be taken as wages last drawn by the employee.
8.1 Maximum Amount of Gratuity:
With effect from May 2010, maximum amount of gratuity payable to employees cannot
exceed 10 lakhs rupees. Though initially the limit was Rs. 3,50,000 but now the limit has
been increased to Rs. 10,00,000 from May 2010 onwards.

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 Gratuity and Bonus

9. Forfeiture of Gratuity:
According to the section 4(6) of the gratuity act, gratuity of employee will be forfeited
when their services are terminated because of act which shows negligence on the part of
employee or any wilful omission thereby leading to loss of property of employer. In this
situation, their gratuity will be forfeited to the amount of damage so caused by the firm.
Value Addition 7: Numerical
Calculate gratuity from the following.
Basic salary including D.A. Rs.6000 per month and has served 20
years with the organization. Calculate gratuity.
Gratuity=6000*15/26*20=Rs. 69230

Gratuity payable can be forfeited either partly or fully:

1. Employees services are terminated because of their disorderly conduct and
behaviour in the organization.
2. Not only this even riotous behaviour or violence in the organization will lead to
forfeiture of their gratuity to the amount of loss caused.
3. Lastly their gratuity can also be forfeited for the acts involving moral turpitude
committed during employment period.
4. Depending on the offence gratuity payable to the employee can either be
forfeited wholly or can be forfeited partially.
An important point to note here is that if employee has to forfeit the employees gratuity
then them i.e. employer must issue termination order which should contain all the
charges so as to prove the employees guilty thereby stating his misconduct towards the
organization.
In case of absence of termination order, employer cannot forfeit the right to gratuity to
employee.
Value Addition 8: Did You Know?
Is teacher an employee according to the Payment of Gratuity
Act 1972?
Yes. Teacher is an employee for the purpose of gratuity under Sec
2(e) with effect from 3rd April 1997
https://cactusblog.files.wordpress.com/2010/03/gratuity.pdf

Payment of Gratuity:
According to the Rule 7 of payment of gratuity act 1972, provision w. r. t. application for
gratuity payment is as follows:
1. Application for payment of gratuity can be made either by employee himself who
is eligible for gratuity payment or the person who has been authorized by his
employer in writing or by their nominee or legal heir at the time of death of
employee when no nominee has been nominated.
2. Employee has to send their application for payment of gratuity to their employees
in writing. It should be made within 30 days from the date gratuity becomes due.
3. And if employer is unable to pay gratuity within 30 days then he is liable to pay
simple interest from the date it becomes due to the date of actual payment.

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 Gratuity and Bonus

Value Addition 9: True or False

Should an Employee Who has Worked for 4 Years and 250

Days be Given Gratuity?

Answer: YES.
Justification:
Employee who has worked for such time duration be given gratuity.
See the following link to understand more.

Source:http://www.citehr.com/436115-gratuity-act-amendment-
2011-pdf-download.html

Employer has to present their application to the employer either by personal service
through registered post.
It is important to note that if applicant fails to apply for payment of gratuity on time i.e.
before 30 days of retirement, then in that case he is still applicable for gratuity. Delay in
application for gratuity payment is no excuse to not to pay gratuity. They have to
mention the reason for delay and can claim gratuity.
As soon as gratuity becomes payable to the employee, employer must send the notice to
the controlling authority about specific amount of gratuity so entitled.
FORM L: is the form which is issued by the employer if claim of employer is admissible.
FORM M: is the form which is issued by the employer if the claim of employee is
inadmissible stating the specific reasons for the claims to be considered as inadmissible.

Value Addition 10: Case Study

Permali Wallance Ltd vs. State of M.P.

This case took place in 1996, regarding former caused damage to

the property of latter thereby leading to forfeit the whole of gratuity.
Case was filled and court gave the judgment that employer cannot
forfeit the gratuity of employer more than the amount of damage.
Employer is liable only up to the extent of damage.
Source: http://indiankanoon.org/doc/89363/

10. Provisions Relating to Gratuity Disputes:

At the time of dispute regarding amount of gratuity payable or claim of gratuity,
employer should submit the amount of gratuity to the controlling authority and
application regarding the same should be sent to controlling authority so that they can
look into the matter. After the due enquiry and giving reasonable opportunity to both the
parties, controlling authority will take decisions and will direct the employer in case
amount to be paid as gratuity is more than amount deposited by the employer with the
controlling authority.

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 Gratuity and Bonus

Value Addition 11: Pause & Think

Who is controlling authority?
Controlling Authority means authority which is appointed by an
appropriate Government under Sec. 3. [Sec 2(d.

Source: http://www.reliancepower.co.in/pdf/Abstract_of_Labour_Laws.pdf

11: Recovery of Gratuity:

According to Sec 8 in case of non-payment of gratuity by employer within 30 days from
due date then aggrieved party (employee/nominee/legal heir) are supposed to write an
application to the controlling authority, who by giving reasonable opportunity to justify
themselves can issue a certificate which states the amount to be collected along with
compound interest from the date of expiry of prescribed time to the actual date of
payment. It is to note that interest payable shall not exceed amount of gratuity payable
under this act.

12. Penalties (Sec 9):

According to the section 9 various penalties with regard to delay in payment of gratuity
are discussed below:
Whoever intentionally makes or represents a false statement in order to avoid
payment of gratuity is liable for imprisonment of 6 months or fine of Rs 10,000 or
both.
Employer making contravention with regard to complying with provision of the act
is liable for imprisonment off 3 months which is extendable up to one year or can
be fined from Rs 10,000 - Rs 20, 000 or both as the case may be.
Penalty with regard to non payment of gratuity payable is imprisonment of
minimum 6 months to maximum 2 years, unless court decides that imprisonment
of lesser period will do justice to both the parties.

Value Addition 11 : Misconceptions

Non Payment of Gratuity is a Serious Offence
Non-payment of gratuity is a serious offence. It is crime and
involves fine or imprisonment or both. Neither organization should
make any delays in payment of gratuity nor they should
unnecessary create problems for employees. Controlling authority is
quite strict about timely payment of Gratuity to the employees who
have worked with so much dedication towards the employees.
Source: http://www.examrace.com/Study-Material/Commerce/
Labor-Laws/Labor-Laws-Gratuity-Payment-1972.html

Summary:
The Payment of Bonus Act came in to force in the year 1965 with the aim to reward
employees for their good work and dedication towards organization.
The Payment of Bonus Act creates a statutory liability of organization to pay bonus,
create a standard formula for the calculation of bonus, determine standard minimum
& maximum percentage of bonus, create redressal platform for the employees.

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 Gratuity and Bonus

As per Section 8, an employee whose salary is up to Rs.10,000 per month, whether

skilled or unskilled, doing manual, supervisory, administrative, technical or clerical
work is entitled to receive bonus on the condition that he has worked for at least 30
working days in that said year.
An establishment can be referred to departments, undertakings or branches of
undertakings whether situated at the same or at different places.
For the computation of gross profit, under the Payment of Bonus Act, two Schedules
have been provided, Schedule 1 for Banking Companies, Schedule 2 for Non-
Banking Companies.
If in any accounting year, an employer has paid any puja bonus or other customary
bonus to any employee, then, that amount shall be entitled to be deducted from the
amount of bonus.
All amounts payable to an employee by way of bonus shall be paid by the employer
within a period of 8 months from the closing of the accounting year. But, this period
of 8 months may be extended up to a maximum of 2 years by the Appropriate
Government.
Gratuity is very important for the employees and there are strict laws which aim to
ensure strict regulations of the same.
Not only this, there are penalties in case of any delay on the part of employer.
Therefore one of the pleasant ways to say goodbye to employee who have worked
so hard for the organization over so many years is gratuity.

Exercises:
I. Objective Type Questions:
A. State True or False:
1. Mr. X joined an organization as an apprentice for Rs.4000 pm and worked for 45 days.
Is he eligible to claim bonus? False
2. If company suffers a loss in a particular accounting year then does employees have
right to claim bonus.
3. Schedule 1 is applicable for Banking Companies.
4. Maximum bonus is subject to 18% of salary.
5. For forfeiture of Right to gratuity, termination order is a must.
6. In case of delay in payment of gratuity, employer pays the interest.
7. Sec 8 relates to penalties in case of non-payment of gratuity.
8. Apprentice is eligible to receive gratuity.
9. Teacher is eligible for entitlement of gratuity.
B. Multiple Choices Questions:
1. Who is not eligible to claim bonus?
a. Retrenched Employee;
b. Piece Rated employee;
c. Seasonal Employee;
d. None of the above.
2. Minimum bonus paid to the employee in case of loss:
a. 8%

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 Gratuity and Bonus

b. 7%
c. 8.33%
d. 8.56%

C. Fill in the Blanks:

1. Form ____ is for application of gratuity by the nominee.
2. Minimum of __ years of continuous service is required to become entitled to payment
of gratuity.
3. Penalty with regard to non-payment of gratuity is minimum imprisonment of__
months
4. Last amendment in Gratuity Act was made on____
5. The Payment of Gratuity Act doesnt apply to state of ___

II. Short Answer Questions:

1. Define employee under the Payment of Bonus Act.
2. Define salary under the Payment of Bonus Act.
3. What is set-on and set-off under the Payment of Bonus Act?
4. Define Establishment.
5. Write short notes on following:
a. Controlling Authority
b. Penalties for Non-payment of Gratuity
6. Explain the appropriate government and wage.

III. Long Answer Questions:

1. Show the calculation of gross profit, for the calculation of bonus under Payment of
Bonus Act.
2. Explain eligibility and disqualification under the Payment of Bonus Act, 1965.
3. Explain the objects and scope of the Payment of Gratuity Act.
4. Discuss various provisions with respect to payment of gratuity in The Payment of
Gratuity Act.

Answers to Objective Type Questions:

1. False; 2. True; 3. True; 4. False.
5. TRUE 6. TRUE 7. FALSE 8. FALSE 9. TRUE
B.
1. Seasonal Employee; 2. 8.33%.
C.
1. FORM J
2.5 YEARS
3.6MONTHS
4. 2010
5. JAMMU AND KASHMIR

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 Gratuity and Bonus

Glossary:
Annuity Due: An annuity whose payment is to be made immediately, not at the end
of the period.
Capital Receipt: Capital receipt refers to a transaction which either results in
decrease of asset or increase of liability.
Corporation: Its a large company or group of companies authorized to act as a
single entity and recognized.
Development Allowance: An amount that can be taken off a business's profit
figure when calculating tax, to allow for the fact that an asset has lost part of its
value during a particular period of time.
Forfeit: It means penalty or lost or surrendered as penalty.
Gratitude: Being thankful or readiness to return kindness.
Heir: Person entitled to property.
Investment Allowance: Investment allowance adds a certain percentage of the
asset's initial cost to the full depreciation write-off and is usually given in the year of
acquisition or as soon as possible thereafter.
Lay-off Compensation: Lay off compensation is to be given by the employer to
employee for the entire period for which employee was laid off.
Nominee: Person who is nominated i.e. who is appointed to an office.
Penalty: Punishment for breaking the law, rule or contract.
Retaining Allowance: Retaining allowance means an allowance payable by
employer to an employee of any factory or other establishment during any period in
which the establishment is not working, for retaining his services.
Social Security: State assistance to the poor and unemployed.
Superannuation: Too old to work for use or payment towards this.
Wage: Fixed regular payment to an employee.

References:
1. Work Cited:
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-3-the-payment-of-
bonus-act-1965.pdf
http://labour.bih.nic.in/Acts/payment_of_bonus_act_1965.pdf
http://www.helplinelaw.com/employment-criminal-and-labour/PBNS/payment-of-
bonus-under-the-payment-of-bonus-act-1965.html
http://www.whatishumanresource.com/the-payment-of-bonus-act-1965
http://indiankanoon.org/
http://ilj.oxfordjournals.org/
http://www.advocatekhoj.com/library/bareacts/paymentofgratuity/index.php?Title=
Payment%20of%20Gratuity%20Act,%201972
www.economictimes.com
www.slideshare.com

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 Gratuity and Bonus

2. Suggested Readings:
Arun Kumar Sen and Jitendra Kumar Mitra Commercial and Industrial Law, Word
Press Publication, 1996
J P Sharma Business and Industrial law Ane Publication
Business and Industrial Laws by Sushma Arora, Taxmann Publications (P) Ltd.
Business and Industrial Law by PR Chadha, first edition, Galgotia Publishing
Company
Practical Guide to Payment of Gratuity Act and Rules by H.L Kumar
3. Web Links:
Visit URL
http://www.advocatekhoj.com/library/bareacts/paymentofbonus/schedule1.php?Titl
e=Payment%20of%20Bonus%20Act,%201965&STitle=The%20First%20Schedule to
know about First Schedule of Bonus Act.
Visit URL
http://www.delhi.gov.in/wps/wcm/connect/doit_labour/Labour/Home/Acts+Impleme
nted/Details+of+the+Acts+Implemented/The+Payment+of+Bonus+Act,+1965/THE
+SECOND+SCHEDULE to know about Second Schedule of Bonus Act.
Visit the URL http://sett.com/theorangeoctopus/13-facts-one-should-know-about-
gratuity-act-in-india to understand how to calculate gratuity.
https://implanthr.wordpress.com/2012/06/24/recent-amendments-to-payment-of-
gratuity-act-1972/
http://www.slideshare.net/vipinsingla/payment-of-gratuity-act
http://www.advocatekhoj.com/library/bareacts/paymentofgratuity/index.php?Title=
Payment%20of%20Gratuity%20Act,%201972
http://labour.gov.in/content/division/latest-notificationamendments.php
http://economictimes.indiatimes.com/news/economy/policy/labour-law-recast-to-
add-more-leave-to-maternity-gratuity-to-be-made-
portable/articleshow/48165770.cms
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-5-the-payment-of-
gratuity-act-1972.pdf
https://www.google.co.in/?gfe_rd=cr&ei=mUpEVcHsJI7I8AeD1IGwBA&gws_rd=ssl#
q=problems+on+gratuity+calculation
http://hrlink.in/topics/how-2-calculate-gratutity-2
http://www.geekinterview.com/question_details/59236
http://hrsuccesstalk.blogspot.in/2013/03/13-facts-one-should-know-about-
gratuity.html
http://hrsuccesstalk.com/forum/Thread-Download-Gratuity-Bare-Act
http://www.relakhs.com/gratuity-benefit-calculation-taxation-eligibility/
https://www.google.co.in/search?biw=1366&bih=667&q=examples+of+gratuity+cal
culation&revid=433662088&sa=X&ei=iktEVbGzA5OGuASUvYCQDQ&ved=0CGcQ1QI
oAA
VIDEO LINKS:
Visit URL https://www.youtube.com/watch?v=_BXqjtF__Ws to learn some easy
tricks to learn sections of Bonus Act.

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 Gratuity and Bonus

Visit URL https://www.youtube.com/watch?v=3ZbjeqpPbls to understand important

definitions under Bonus Act.
Visit URL https://www.youtube.com/watch?v=7mUp5Ou4clU to learn the answers of
some important questions on Bonus Act.
Visit URL https://www.youtube.com/watch?v=J8HIkhPT_Yk to know some more
facts about Bonus Act.
Visit the URL http://www.slideshare.net/SoumyaSahoo1/gratuity-act-15512612
https://www.youtube.com/watch?v=wyiKRAhLFsU to know/understand gratuity
from the scratch.
Visit the URL https://www.youtube.com/watch?v=7U4fPaJn5RY to learn various
sections in easy manner.
Visit the URL https://www.youtube.com/watch?v=Mg6sbMXAgyE to know basics of
gratuity.

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