To nominate for gratuity, employees must complete one year of service, fill out Form F with nominee details, and submit it to the employer. The nomination must favor family members if applicable, and can be updated anytime. Employers must securely store all nominations.

The Payment of Gratuity Act, 1972, is one of the most significant legislations ensuring financial security to employees post-employment. It applies to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments where ten or more persons are employed.

One of the most critical and often overlooked components of this Act is the nomination procedure outlined in Section 6. This provision ensures that the rightful nominee receives the gratuity amount in the unfortunate event of the employee’s death.

In this article, we will take an in-depth look at the nomination procedure under the Payment of Gratuity Act, 1972, covering its importance, the rules governing nominations, the employer’s responsibilities, and the implications of not adhering to the prescribed process.

What is Gratuity?

Gratuity is a statutory lump sum payment made by an employer to an employee as a token of appreciation for the services rendered by the employee over a long period. It is not linked to any contribution by the employee and becomes payable under certain conditions prescribed by law.

It becomes payable when an employee completes at least five years of continuous service and:

• Retires,
• Resigns,
• Is terminated (not for misconduct),
• Dies, or
• Suffers from disability due to an accident or disease.

In the case of the employee’s death, gratuity is payable even if the employee has not completed five years of service. The nomination procedure ensures that the gratuity amount is paid promptly to the right person without legal disputes or delays.

Legal Interpretation from Section 4 of the Act:

Section 4(1) of the Act states:

“Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:

1. on his superannuation, or
2. on his retirement or resignation, or
3. on his death or disablement due to accident or disease…”

From this, we understand that gratuity is a terminal benefit payable under specific conditions and is calculated based on the employee’s last drawn wages and length of service.

Features of Gratuity:

• Eligibility: Minimum five years of continuous service (except in case of death or disablement).
• Non-contributory: Entirely paid by the employer.
• Payment Formula: 15 days’ wages for every completed year of service (subject to conditions and limits).
• Tax Benefits: Gratuity received by employees is partially or fully tax-exempt under the Income Tax Act, 1961, depending on the type of employment.

Section 6 of the Payment of Gratuity Act, 1972

Section 6 of the Act mandates that every eligible employee to nominate a person or persons who will receive the gratuity amount in the event of their death. Let us break down this section for better understanding:

1. Eligibility to Make a Nomination: Every employee who has completed one year of continuous service is required to make a nomination. The nomination must be submitted in the prescribed form (commonly known as Form F), within 30 days from the completion of one year of service.
2. Nomination in Favor of Family Members: If the employee has a family at the time of making the nomination, the nomination must be in favor of one or more members of their family. A nomination made in favor of a person outside the family, in such cases, is void.
3. Nomination Without a Family: If the employee does not have a family at the time of nomination, the nomination can be made in favor of any person. However, if the employee subsequently acquires a family, the earlier nomination becomes invalid. The employee is then required to submit a fresh nomination in favor of one or more family members.
4. Modification of Nomination: The Act allows employees to modify their nomination at any time. The modification must be made in writing and submitted to the employer in the prescribed manner.
5. In Case of Predeceased Nominee: If the nominee dies before the employee, the interest of the nominee reverts to the employee. The employee must then make a fresh nomination for the reallocated share.
6. Employer’s Responsibility: Every nomination, fresh nomination, or modification must be submitted to the employer, who is obligated to keep it in safe custody. This record becomes critical for the prompt and correct disbursement of gratuity.

Who Qualifies as a Family Member?

The Act defines ‘family’ to include:

• For a male employee: himself, his wife, children (married or unmarried), dependent parents, dependent parents of his wife, and the widow and children of his predeceased son.
• For a female employee: herself, her husband, children (married or unmarried), dependent parents, dependent parents of her husband, and the widow and children of her predeceased son.

Additionally, legally adopted children are considered part of the family, and a child lawfully adopted by someone else is excluded.

Nomination Procedure Under the Payment of Gratuity Act, 1972

The government has prescribed a format for the nomination form, typically known as Form F. This form is an official document that captures the nominee’s details, ensuring that gratuity can be released efficiently in the event of the employee’s death.

The procedure for making a nomination includes several critical steps:

Step 1: Obtaining the Nomination Form:

The employee should collect Form F from the employer, human resources department, or download it from the official labor department portal of the respective State or Central Government.

Step 2: Filling in the Details:

The employee must enter personal details such as full name, employee ID, department, designation, and date of joining. The nominee’s full name, address, relationship with the employee, and date of birth should be clearly mentioned. If more than one nominee is declared, the proportion of gratuity to be received by each nominee must be specified (e.g., 50% to spouse, 50% to child).

Step 3: Declaration and Signature:

The employee must sign and date the form, declaring the accuracy and intent behind the nomination. In cases where the employee is illiterate or unable to sign, a thumb impression may be used, witnessed, and countersigned by a responsible officer or colleague.

Step 4: Submission to Employer:

The completed nomination form must be submitted to the employer or the designated officer in the HR department. The employee should ensure that the employer provides an acknowledgment of receipt for future reference.

Step 5: Employer’s Acknowledgment and Record Keeping:

Upon receiving the nomination, the employer is required to verify the form and ensure it complies with the Act. The nomination form should be securely stored in the employee’s personnel file or maintained digitally if an electronic record-keeping system is used.

Step 6: Updating the Nomination:

If there is any change in the family status (such as marriage, divorce, birth of children, or death of a nominee), the employee must submit a fresh Form F reflecting the updated details. The new nomination follows the same process of filling, signing, and submission.

Step 7: Annual Review and Communication:

Though not mandatory under the Act, it is considered best practice for employers to remind employees annually to review their nomination details. This ensures the record remains current and avoids complications during claim settlement. By following this detailed procedure, both the employee and employer can fulfill their respective duties under the Act, ensuring legal compliance and financial protection for the beneficiaries.

Importance of Nomination

Proper nomination serves several vital purposes:

• Avoids Legal Disputes: In the absence of a valid nomination, disputes among legal heirs may arise, causing delays and complications.
• Facilitates Smooth Disbursement: A valid nomination ensures quick disbursement of the gratuity to the right person.
• Upholds Employee’s Wishes: Nomination allows the employee to express their intent regarding who should receive their gratuity.

Consequences of Not Making a Nomination

Failure to make a nomination can lead to several complications:

• The gratuity amount will have to be claimed by legal heirs,
• Legal verification and succession certificates may be required,
• The process becomes time-consuming and stressful for the family,
• It may lead to disputes among potential claimants.

Changing Life Circumstances and Updating Nomination

Employees must update their nominations in line with changes in personal circumstances, such as:

• Marriage,
• Birth of a child,
• Death of a nominee,
• Divorce or legal separation,
• Adoption.

Keeping the nomination up to date ensures that the intended beneficiaries receive the gratuity amount.

Employer’s Obligations and Best Practices

Under the Act, the employer has several responsibilities:

• Inform employees about their right and obligation to nominate,
• Provide the prescribed nomination form,
• Accept and acknowledge the receipt of the form,
• Keep the nomination in safe custody,
• Ensure the nomination is considered at the time of gratuity disbursement.

Best practices include maintaining digital records, confirming employees, and regularly reminding employees to update nominations.

Common Mistakes to Avoid

• Not updating nomination after marriage or acquiring a family,
• Nominating someone outside the family while having family members,
• Failing to inform the employer of changes in nomination,
• Not keeping a copy of the nomination form.

Verdict

The nomination procedure under the Payment of Gratuity Act, 1972, is a simple yet essential step in securing the financial future of an employee’s loved ones. Both employees and employers must understand the legal requirements and responsibilities associated with nominations. By adhering to the correct procedure, one can ensure that gratuity benefits reach the intended individuals without unnecessary delay or legal hurdles.

Employees should treat nominations with the same seriousness as other legal documents like wills and insurance. Employers should play a proactive role in guiding employees through the process and ensuring compliance. Together, this promotes a culture of legal awareness and financial security in the workplace.

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