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Payment of Bonus Act and Payment of Gratuity Act: Know your essentials

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In the quest to simplify your HR processes, greytHR organized yet another Expert Series Webinar with Pratik Vaidya on the Payment of Bonus and Payment of Gratuity Acts. This resourceful webinar explained in detail the nitty-gritty of the Bonus and Gratuity Payment Acts and helped resolve the queries of our ever-keen audience.

Here are the highlights for those who missed it or for those who wish to re-visit the webinar.

Payment of Bonus Act

Objective: The objective of the Payment of Bonus Act is to reward the employee of the organization by sharing the profits earned and is linked to productivity.

Applicable to: The Payment of Bonus Act is applicable to any establishment with 20 or more employees or any factory with 10 or more employees.

Eligibility: Employees drawing ₹21000 per month or less (basic + DA, excluding other allowances) and have completed 30 working days in that financial year are eligible for bonus payment.

Components of bonus: Please note, salary or wages include only basic and DA for bonus payment, and the rest of the allowances (e.g. HRA, overtime, etc.) are excluded.

Min/max and time limits on bonus payments: Bonus should be paid at a minimum rate of 8.33% and maximum rate of 20%. It needs to be paid within 8 months from the close of the accounting year.

Disqualification of bonus: Employees can be disqualified from bonus payments if they are dismissed on the basis of fraud, misconduct, or even absenteeism. Please ensure that on dismissal, the procedures of domestic enquiry, proper documentation and employee acceptance of the misconduct are all carried out as per the standing orders before disqualifying the bonus payment.

Calculation of bonus: As per the amendment on the Payment of Bonus Bill passed in 2015, when wages or salary exceeds ₹7000 or the minimum wages fixed by the government, bonus will be payable on ₹7000 or the minimum wages as fixed by govt., whichever is higher.

Examples:

  1. Salary (Basic + DA) = ₹6000, Min Wages = ₹8000, Bonus will be payable on ₹6000
  2. Salary (Basic + DA) = ₹6000, Min Wages = ₹6500, Bonus will be payable on ₹6000
  3. Salary (Basic + DA) = ₹7200, Min Wages = ₹6000, Bonus will be payable on ₹7200
  4. Salary (Basic + DA) = ₹7200, Min Wages = ₹8000, Bonus will be payable on ₹8000
  5. Salary (Basic + DA) = ₹10000, Min Wages = ₹8000, Bonus will be payable on 8000
  6. Salary (Basic + DA) = ₹18000, Min Wages = ₹8500, Bonus will be payable on ₹8500

Note: This bonus payable will be at a min rate of 8.33%.

Compliance required by employers: Employers need to comply with the following:

  • A register showing the computation of allocable surplus is maintained in Form A
  • A register showing the set-on and set-off of the allocable surplus is maintained in Form B
  • Details showing the amount of bonus due, deductions and actual bonus amount disbursed are maintained in Form C
  • Annual returns to be filed in Form D before Feb 1st

Penalty: Any violation can lead to imprisonment for up to 6 months and may (or may not) include a fine amount.

Q&A

Some common queries that were addressed are detailed below:

Query 1: Should we pay bonus to contractual employees?

Ans: No, it is not the prerogative of the employer to pay bonus to the contractors working under him. The bonus liability lies with the vendor who has contracted out the employees.

Some employers pay out bonus to their contractors for their welfare on goodwill when the vendor is unable to pay out the bonus. This is considered ex-gratia and not bonus and is the discretion of the employer in this case and he is not legally bound to pay bonus to his contractors.

Query 2: If I own a startup, should I pay out bonus for my employees in the first year?

Ans: For the first 5 years, organizations need not pay bonus if they have made losses. If they have made profits in any year in the first 5-year period, they will have to pay out bonus for that particular year. After the completion of 5 years, organizations are required to pay bonus as per Sec 16-1b, irrespective of whether they are making a profit or loss. Refer to section 16-1b for detailed clarifications on the calculation of bonus in the 6th accounting year and the 10th accounting year.

Query 3: How do we settle bonus if an employee exits the organization before the completion of the financial year?

Ans: Bonus needs to be paid as part of the settlement to the employee, when he exits, on a pro-rata basis. If the bonus percentage is later increased due to increase in profits, then the difference in the bonus amount needs to be transferred to the employee or a cheque sent before Nov 30th of that year.

It is important to ensure that this is done as any amount due to be paid to any employee and not paid will appear on the liability side of the balance sheet of the employer and will be considered as non-compliance.

Query 4: I have paid bonus, but have not maintained records for it. Would it cause a problem?

Ans: This will be deemed non-compliance and will be checked during labor inspection. It is mandatory to maintain Forms A, B, C and D as required.

Payment of Gratuity Act

Objective: Gratuity is a benefit paid to employees who have rendered at least 5 years of continuous service and is a form of gratitude provided by the employer to the employee in monetary terms for the services rendered.

Applicable to: Gratuity must be paid by organizations employing 10 or more people.

Eligibility: Organizations are liable to pay gratuity when:

  • An employee is eligible for superannuation (i.e. 58 years)
  • An employee retires
  • An employee resigns after 4 years and 240 days with a single employer
  • An employee suffers disability due to illness or accident
  • An employee death

Some key points emphasized/clarified were:

  1. An employee becomes eligible for gratuity when he completes 5 years of continuous service. (Note: In the fifth year, 1 year of completed service = 240 days)
  2. When an employee suffers disability/death, gratuity is paid even if he has not finished 1 year of completed service
  3. If you have your office in more than one state, then the organization comes under the purview of the central government for gratuity payment (and not the state govt).
  4. Examples of gratuity payment based on different periods of employment:
    • 4 years 6 months – Gratuity is not paid (employee has not completed 240 days in the last year)
    • 5 years or 60 months – Gratuity is paid
    • 4 years 9 months – Gratuity is paid
    • 4 years 7 months with 5 days a week working – Gratuity is paid (7 months = 210 days and < 240 days, but for organizations with less than 6-day working weeks, the eligibility period is 4 years 190 days and not 4 years 240 days. Therefore, gratuity is paid) 

Calculation of gratuity: Formula for calculating gratuity is as follows:

Gratuity = Number of years* 15/26*monthly salary (Basic +DA)

[One gets 15 days’ salary for every completed year of service]

Max limit for gratuity: Max limit for gratuity is ₹20 lakhs.

Compliance: Employers are required to maintain the following:

  • Form A as notice of opening of an office/branch
  • Copy of Form F/Form G – Nomination submitted by the employee. Please note that it is the duty of HR and the employee to update marital status and fill in the revised Form F or Form G to update dependents for nomination. This is important because failure to do this has led to many disputes in claiming gratuity among dependents
  • Processing application for gratuity in Form I - Gratuity has to be paid irrespective of whether employee fills Form I or not

Display of notice:  Form U – Need to display the abstract of the Act and rules and the person responsible.

Penalties:  

  • Imprisonment for 6 months or fine up to ₹10000 for avoiding to make payment by false statement or representation
  • Imprisonment for not less than 3 months and up to 1 year with a fine for defaulting on compliance with the provisions of the Act or Rules.

Q&A

Some of the key questions that were discussed are given below for your reference:

Query 1: What happens when there is a delay in the payment of gratuity?

Ans: Interest is paid on gratuity, if there is a delay of more than 1 month, usually at the debt market rate.

Query 2:  Do we have to take compulsory insurance?

Ans: There is a requirement for compulsory insurance only for the state of Andhra Pradesh; that is, if your organization falls under the purview of the state government.

Query 3: Is there any legal binding to mention gratuity in CTC?

Ans: There is no legal binding. You may mention gratuity in the CTC, but ensure that you indicate/clarify that it is a notional value and will be applicable only when the Act is applicable.

Query 4: Should we pay gratuity to contractors?

Ans: The Act here is similar to the Bonus Act in this respect. It is not the prerogative of the employer to pay gratuity to his contractors. It is the liability of the vendor (who has contracted them out) to pay for his employees. There are many cases where the vendor has been charging 4.81% gratuity to his client (the employer) to pay for his contractors. Please note that this is completely at the discretion of the employer to do this for the welfare of the employee and is not a legal binding. If the employer pays for his contractors, it is considered as ex-gratia and not gratuity.

Query 5: If we own a startup which is not yet 5-year-old, is it necessary to start an account for gratuity payments? For any organization, should we maintain a trust for gratuity payments?

Ans: Not mandatory. It is totally based on the risk management approaches you take and is at your discretion. Generally, the account/trust is opened and managed so that the employers have enough funds to cough up when they start making gratuity payments. This is completely an employer’s decision and not a legal binding.

Query 6: Which component/ratio of the basic pay do we consider for calculating gratuity payment?

Ans: Gratuity payment is calculated based on last drawn basic + DA. No other components are included.

Query 7: If a person dies at 33 years, do we have to calculate gratuity payment until his retirement?

Ans: No. Calculate only the number of years of service in case of death and not until his retirement age. For example, if a person joins an organization when he is 30 years old and he dies at 33 years of age, then gratuity will be calculated only for 3 years.

Query 8: If any payment is pending from an employee, can we recover the same from gratuity during final settlement?

Ans: No, gratuity is the right of the employee and payments cannot be recovered from it, unless there is an employee misconduct which is established.

Query 9: When we say continuous service, does it include leaves/LOP too?

Ans: Yes, continuous service includes any leaves, breaks, absence due to any reason, etc.  

Query 10: If an employee is in the training or probation period for the first year, do we include that period for gratuity payments?

Ans: Yes, irrespective of whether he is in training/probation, he is an employee and is eligible for all benefits including gratuity.
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