Gratuity: Calculating and Provisioning the Liability
Gratuity is governed by the Payment of Gratuity Act 1972, which applies to establishments with 10 or more employees. An employee becomes eligible for gratuity after completing 5 years of continuous service (with the same employer). The formula: 15 days x last drawn basic salary x number of years of service, divided by 26 (working days in a month).
Example: An employee with 7 years of service and a last drawn basic salary of INR 80,000/month is entitled to: (15/26) x INR 80,000 x 7 = INR 3,23,077. The Payment of Gratuity Act caps the maximum gratuity at INR 20 lakh (revised from INR 10 lakh in 2018). Employees terminated for misconduct may be denied gratuity, but only in narrow circumstances.
For GCC financial planning: gratuity must be provisioned as a long-term liability from day one of employment. Actuarial valuation of the gratuity liability (required for Ind AS 19 and AS 15 employee benefits accounting) must be conducted annually. Many GCCs purchase group gratuity insurance from LIC or private insurers to fund this liability, which also provides a tax deduction under Section 40A(7) of the Income Tax Act.
Gratuity is due even on resignation
A common misconception: gratuity is payable to an employee who resigns (not just to those terminated or retired) after completing 5 years. An employee who resigns after 7 years of service is entitled to full gratuity. Ensure the HR policy manual and offer letters do not incorrectly state otherwise.
POSH: Internal Complaints Committee
The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act 2013 (POSH Act) mandates that every employer with 10 or more employees must constitute an Internal Complaints Committee (ICC). The ICC must have: at least 4 members, a presiding officer who is a senior female employee, at least two members from among employees committed to women's causes, and at least one external member from an NGO or association committed to the cause of women or who is familiar with issues relating to sexual harassment.
Failure to constitute the ICC is punishable by a fine of INR 50,000 for the first offence and INR 1 lakh for repeat offences, plus possible cancellation of the registration or license to conduct business. Officers of the company can be personally prosecuted. Many GCC HR teams operate at 15-20 employees before realizing the ICC requirement applied from employee 10.
Annual report: the ICC must submit an annual report to the employer and to the district officer by the end of each calendar year. The employer must include ICC activities in the Annual Report (Board's Report) filed with the ROC. The POSH annual return is one of the most commonly missing elements in GCC annual ROC filings.
Maternity Benefits and Leave Entitlements
The Maternity Benefit (Amendment) Act 2017 provides 26 weeks of paid maternity leave for the first two children (12 weeks for the third child and beyond). The employer (not the government) pays the maternity benefit during this period. The employee cannot be dismissed during maternity leave or for 6 weeks following the expiry of maternity leave.
Additional benefits introduced in 2017: creche facility mandatory for establishments with 50 or more employees (or the employee can use a designated creche), 'work from home' option to be facilitated (at the employer's discretion) after the maternity leave period, and medical bonus of INR 3,500 if the employer does not provide prenatal confinement and postnatal care.
Paternity leave: India does not have a national paternity leave law for private sector employees. Most GCCs provide 5-15 days of paternity leave by company policy. Some states have state-level paternity leave provisions for government employees, but these do not apply to private IT companies.
Glossary terms referenced in this guide