The Government has enacted two Acts making it statutory for establishments to reward their employees. These two Acts, namely The Payment of Bonus Act, 1965 and The Payment of Gratuity Act, 1972 provide benefits to all employees who have put in a certain period of service. In this article, we highlight the basic features of these Acts and the eligibility to receive these benefits.
The Payment of Bonus Act, 1965
The government enacted this Act to provide for payment of Bonus to all employees based on profit or productivity. The Act provides for payment of minimum Bonus or maximum bonus as decided by the employer. The objective is to reward the employee by sharing a part of the profit earned by the company..
Applicability and Eligibility
All establishments with 10 or more employees are eligible to pay a Bonus to their employees. From the employee’s point of view, every employee drawing Rs:21,000/- or less ( Basic + DA excluding other allowances) per month is eligible to receive a bonus. All allowances like HRA, Overtime, TA, commissions, etc are excluded from the calculation of Bonus.
The minimum rate of Bonus is 8.33% of the salary and the maximum is 20% of the salary. The establishment has to pay a Bonus within 8 months from the close of the financial year. The minimum salary for calculating bonus has been raised to Rs:7,000/- per month from the earlier Rs:3,500/-. Therefore, as of now, the minimum bonus payable will be based on the minimum salary i.e., Rs:7,000/- per month or the rate of minimum wages, whichever is higher.
To become eligible for bonus in a particular year, an employee has to work for not less than 30 working days in that accounting year. Any employee who has been dismissed from service for fraud, violent behavior, theft or misappropriation of funds or for damaging the property, or who has caused financial loss to the company is not eligible to receive bonus.
The employee has to pay the bonus by A/c. Payee cheque or by direct transfer to the Account. As mentioned earlier, the bonus has to be paid within 8 months from the close of the accounting year. However, the government may extend this.
Records/Registers to be maintained
The employer has to maintain the following records or registers:
- A register in Form A that shows the allocable surplus.
- A register in Form B showing set on and set off of the allocable surplus.
- A register in Form C showing details of bonus disbursed.
- Submission of a return in Form D to the authorities within 30 days of the time limit specified under Section 19.
The employer has to make available all the records/registers as sought by the concerned authorities.
Any contravention of the provisions of the Act will bring about legal action in the form of imprisonment up to 6 months or with a fine up to Rs:1,000/-or both.
The Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 provides for Payment of Gratuity to employees under conditions set out in the Act. Every establishment that is covered under this Act is mandated to provide benefits to all eligible employees.
Applicability & Eligibility
All shops and establishments that employ 10 or more employees come under the purview of this Act.
A shop or establishment that has become applicable to the Act shall continue to be governed under this Act notwithstanding the number of employees on their rolls at any point in time after it has become applicable.
The eligibility of employees depends on certain conditions:
- Every employee shall be eligible for gratuity provided he or she has completed 5 years of continuous service.
- An employee due for superannuation/retirement (58 years) is eligible for gratuity.
- An employee who suffers disability due to sickness or accident is eligible for gratuity.
- An employee who dies during his period of service is eligible to receive gratuity.
- An employee who resigns from service after continuously working for 4 years and 240 days is eligible for gratuity.
Gratuity is calculated on the basis of the following formula:
The following formula is used to calculate Gratuity.
Gratuity = Number of years worked x 15/26 x monthly salary (Basic + DA)
For every year of service, a person gets 15 days’ salary.
The maximum limit for payment of gratuity is Rs:20 lakhs.
Records/Registers to be maintained
- Form A has to be submitted to the controlling authority as notice regarding the opening of the establishment within 30 days of the Act becoming applicable to the establishment.
- In the event of closure of the establishment, Form C has to be submitted within 60 days of the intended day of closure.
- Form B to be submitted to intimate change in name, address, nature of business, etc.
- Displaying an abstract of the Act and Rules in Form U in English or the language understood by the employees is mandatory.
- Any employer who has their gratuity fund has to obtain Insurance cover as laid down under Section 4-A of the Act.
- Employer has to issue a notice of payment to the employee within the stipulated period.
- The employer has to submit all records/registers as and when called for by the controlling authority.
Penalty for contravention
Contravention of rules invites different penalties:
- If an establishment has its gratuity fund and does not obtain Insurance cover, then a fine up to Rs:10,000/- is levied. For each day of default Rs:2,000/- is levied.
- In the event of making false statements or representations with the intention of avoiding payment of gratuity, then the penalty is 6 months imprisonment or with a fine up to R:10,000/- or both.
- For non-compliance with any provisions of the Act, the penalty is imprisonment for a minimum period of 3 months or a maximum of 1 year or a minimum fine of Rs:10,000/- or a maximum of Rs:20,000/-.
- Penalty for non-payment of gratuity is imprisonment for a minimum period of 6 months with a maximum of 2 years.
The Payment of Bonus Act, 1965 and Payment of Gratuity Act, 1972 was enacted by the government to enable the employees to receive a form of reward for their service to the establishment. All establishments that employ 10 or more employees have to comply with the rules and regulations of these Acts. The onus is on the establishment to maintain all the employee-related records efficiently and accurately. The ideal solution to maintain these records efficiently and in an error-free manner is to outsource the entire payroll process to an efficient service provider.
GetifyHR with its vast experience in the industry and use of the latest high-end technology is a front-runner in all aspects of Payroll Processing. Their cloud-based application can handle Payroll, Attendance & Leave Management, and Statutory Compliance requirements in a most efficient manner. Handling Bonus and Gratuity issues in association with GetifyHR will naturally reduce the burden on the HR team and provide for better functioning of the organization.