If a company has 300 employees, out of which 120 employees have completed 5 years of continuous service, should we consider all 300 employees or only the 120 employees when calculating the provision for gratuity?
From India, Ahmedabad
From India, Ahmedabad
Gratuity should be provided for the entire employees because gratuity is also payable to the legal representatives of a deceased employee without reference to the qualifying service of five years. Therefore, if you have 300 employees, the provision should be made taking in to account all the 300 employees and not exclusively for those who have completed 5 years of service. Provision for gratuity is calculated by the Accountants after considering actuarial valuation done by the experts in the field. They usually take the age of employees, wages, service and probable number of employees who may leave during the year.
From India, Kannur
4242From India, Kannur
Relevant provisions of the Act is reproduced here for proper understanding -
THE PAYMENT OF GRATUITY ACT, 1972
2. Definitions.—In this Act, unless the context otherwise requires,—
xxxxx
2[2A. Continuous service.—For the purposes of this Act,—
(1) an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order 3*** treating the absence as break in service has been passed in accordance with the standing orders, rules or regulations governing the employees of the establishment), lay-off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act;
(2) where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer—
(a) for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than—
(i) one hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case;
(b) for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than—
(i) ninety-five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) one hundred and twenty days, in any other case.
1. Subs. by Act 25 of 1984, s. 2, for clause (r) (w.e.f. 1-7-1984).
2. Ins. by Act 26 of 1984, s. 4 (w.e.f. 18-5-1984).
3. The words “imposing a punishment or penalty or” omitted by Act 22 of 1987, s. 3 (w.e.f. 1-10-1987).
5
1[Explanation.—For the purposes of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which—
(i) he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 (20 of 1946), or under the Industrial Disputes Act, 1947 (14 of 1947), or under any other law applicable to the establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and
(iv) in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed 2[such period as may be notified by the Central Government from time to time];]
7[4A. Compulsory insurance.—(1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer:
Unquote:
As per above provisions once any employee completes "five years of continuous service" the liability to pay 'gratuity' accrues and immediately after completion of one year it shall be recognised adequately.
And if the establishment doesn't maintain a dedicated 'gratuity fund' it becomes obligatory to rope in LIC as a 'fund manager' for the purposes of gratuity. And consequently LIC will have it's task cut out to take care of gratuity payment as and when it arises. Therefore the employer has no choice of bifurcating the list <5 yrs of service etc. The Actuarial system takes care of the formula for computing the gratuity year after year giving you the net gratuity incremental liability to be provided for in your Accounts.
Under Accounting Standards that are used in India, such as Ind AS 19 and As 15(R), gratuity has to be accounted as a liability when the employee has rendered service to the company, and is recognised as an expense when the company consumes benefit arising out of the services rendered by the employee. 'd) Employee's cost-Benefit Expenses /Terminal Benefits- Compensation for employees' (as the case may be) as per the Schedule attached to the Trading and Profit & Loss Account as per the Companies Act' for every financial year.
From India, Bangalore
THE PAYMENT OF GRATUITY ACT, 1972
2. Definitions.—In this Act, unless the context otherwise requires,—
xxxxx
2[2A. Continuous service.—For the purposes of this Act,—
(1) an employee shall be said to be in continuous service for a period if he has, for that period, been in uninterrupted service, including service which may be interrupted on account of sickness, accident, leave, absence from duty without leave (not being absence in respect of which an order 3*** treating the absence as break in service has been passed in accordance with the standing orders, rules or regulations governing the employees of the establishment), lay-off, strike or a lock-out or cessation of work not due to any fault of the employee, whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act;
(2) where an employee (not being an employee employed in a seasonal establishment) is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer—
(a) for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than—
(i) one hundred and ninety days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) two hundred and forty days, in any other case;
(b) for the said period of six months, if the employee during the period of six calendar months preceding the date with reference to which the calculation is to be made, has actually worked under the employer for not less than—
(i) ninety-five days, in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and
(ii) one hundred and twenty days, in any other case.
1. Subs. by Act 25 of 1984, s. 2, for clause (r) (w.e.f. 1-7-1984).
2. Ins. by Act 26 of 1984, s. 4 (w.e.f. 18-5-1984).
3. The words “imposing a punishment or penalty or” omitted by Act 22 of 1987, s. 3 (w.e.f. 1-10-1987).
5
1[Explanation.—For the purposes of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which—
(i) he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946 (20 of 1946), or under the Industrial Disputes Act, 1947 (14 of 1947), or under any other law applicable to the establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and
(iv) in the case of a female, she has been on maternity leave; so, however, that the total period of such maternity leave does not exceed 2[such period as may be notified by the Central Government from time to time];]
7[4A. Compulsory insurance.—(1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer:
Unquote:
As per above provisions once any employee completes "five years of continuous service" the liability to pay 'gratuity' accrues and immediately after completion of one year it shall be recognised adequately.
And if the establishment doesn't maintain a dedicated 'gratuity fund' it becomes obligatory to rope in LIC as a 'fund manager' for the purposes of gratuity. And consequently LIC will have it's task cut out to take care of gratuity payment as and when it arises. Therefore the employer has no choice of bifurcating the list <5 yrs of service etc. The Actuarial system takes care of the formula for computing the gratuity year after year giving you the net gratuity incremental liability to be provided for in your Accounts.
Under Accounting Standards that are used in India, such as Ind AS 19 and As 15(R), gratuity has to be accounted as a liability when the employee has rendered service to the company, and is recognised as an expense when the company consumes benefit arising out of the services rendered by the employee. 'd) Employee's cost-Benefit Expenses /Terminal Benefits- Compensation for employees' (as the case may be) as per the Schedule attached to the Trading and Profit & Loss Account as per the Companies Act' for every financial year.
From India, Bangalore
@Madhu Sir, i have doubt, if only 120 people completed 5 year service, why should other 180 be given gratuity when they did not complete? i did not undertsnd this part
From India, Hyderabad
From India, Hyderabad
Hi,
It is not about the payment of Gratuity for other 180 employees who are yet to complete 5 years but about making provision for Gratuity for all the employees including employees who are yet to complete 5 years service. The question is that whether to consider all 300 employees or only the 120 employees who had completed 5 years for the purpose of calculating provision for Gratuity. Mr.Madhu rightly clarified as above.
Payment of Gratuity will be only at the time of exit , after completing 5 years ( or in case of any death of the employee - payment to be made to nominee of the Employee) only but in every Organisation Accounts Dept use to calculate the provision for Gratuity wherein all employees to be considered irrespective of years completed by them.
From India, Madras
It is not about the payment of Gratuity for other 180 employees who are yet to complete 5 years but about making provision for Gratuity for all the employees including employees who are yet to complete 5 years service. The question is that whether to consider all 300 employees or only the 120 employees who had completed 5 years for the purpose of calculating provision for Gratuity. Mr.Madhu rightly clarified as above.
Payment of Gratuity will be only at the time of exit , after completing 5 years ( or in case of any death of the employee - payment to be made to nominee of the Employee) only but in every Organisation Accounts Dept use to calculate the provision for Gratuity wherein all employees to be considered irrespective of years completed by them.
From India, Madras
As already pointed out in death cases there is no qualifying service. That is why the actuarial valuation is done which is based on probability theory. A provision is not a cost per se but it is only a protection in anticipation of a future cost. In the absence of such a provision the entire profits will be distributed among the employers, and in the subsequent year when there is a need for payment of gratuity they will have to take it from the working capital. That will have impact in the working capital and then may result in loss also.
From India, Kannur
From India, Kannur
I remember in '80s the Accounting Standard concerning making a provision in the Final Accounts in the books of the Cos gained importance following the 'Actuarial valuation mode' in accordance with the Accounting Standards as prescribed by the CA apex body made it compulsory to adhere to ASs. Till then employers followed actual computation on 'accrual' basis making incremental provisions in the accounts every year. Which even now I strongly feel a logical method for making a provision for liability or contributing to the Gratuity Fund managed by institutions such as LIC.
A detailed write up is attached for the information of all.
From India, Bangalore
A detailed write up is attached for the information of all.
From India, Bangalore
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