Gratuity is an important component of employee benefits that rewards long-term service and loyalty. It ensures financial support to employees after they leave an organisation, retire, or in the event of unforeseen circumstances. However, when a company shuts down or merges with another entity, employees often face uncertainty regarding their gratuity payments. Understanding how to claim gratuity in such situations and using tools such as a gratuity calculator can help you determine your entitlement and take the right steps to secure your dues.
Understanding gratuity and eligibility
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for continuous service. It is governed by the Payment of Gratuity Act, 1972, and applies to organisations employing ten or more individuals. To be eligible, an employee must have completed at least five years of continuous service with the same employer.
The payment becomes due upon resignation, retirement, death, or disablement. The amount payable depends on the employee’s last drawn salary and years of service. In the event of a company shutdown or merger, the employee’s right to gratuity remains protected under the law.
How gratuity is calculated
The gratuity amount is based on a simple formula:
Gratuity = (15 × Last drawn salary × Years of service) ÷ 26
Here, the “last drawn salary” includes basic pay and dearness allowance. To simplify this process, you can use a gratuity calculator, which automatically computes the payable amount based on your input. This helps you understand your entitlement before approaching your employer or the new management in case of a merger.
What happens when a company shuts down
If your employer shuts down operations permanently, you are still entitled to receive your gratuity. The Payment of Gratuity Act mandates that the employer must settle all gratuity dues within 30 days of the shutdown. In case the employer fails to make the payment, employees can file a claim with the controlling authority under the Act.
The authority will investigate and direct the employer to pay the amount due, along with interest for delayed payment. Knowing how to claim gratuity in such situations ensures that you do not lose your rightful benefit due to organisational changes.
Gratuity in case of a merger or acquisition
During a merger or acquisition, the new company generally takes over all assets and liabilities of the previous organisation, including employee obligations. This means your gratuity eligibility and accumulated service remain intact. If you continue working under the new management without interruption, your period of service is counted from your original joining date.
In case the new company refuses to recognise your previous tenure, you can lodge a complaint with the labour department or the controlling authority. Being aware of how to claim gratuity ensures that you receive fair treatment during such transitions.
Claiming gratuity after resignation or job loss
If you resign or are terminated due to the company’s closure or restructuring, you can claim your gratuity directly from the employer or administrator handling the shutdown. You need to submit a formal written application (Form I) within 30 days from the date gratuity becomes payable.
If the employer does not respond within the stipulated period, you may escalate the matter to the controlling authority under the jurisdiction of the regional labour commissioner. Using a gratuity calculator before submission helps verify the correctness of the amount offered by the employer.
Gratuity claims in case of death or disablement
In cases where an employee passes away or becomes permanently disabled before completing five years of service, the law still entitles them (or their nominees) to gratuity payments. The amount is calculated based on the years served, and the employer must release the funds within 30 days. In the case of company closure or merger, this liability transfers to the new management or the appointed administrator.
Income tax treatment of gratuity
Gratuity payments are eligible for tax exemptions under Section 10(10) of the Income Tax Act. For employees covered under the Payment of Gratuity Act, the exemption is up to Rs. 20 lakh. Any amount exceeding this limit becomes taxable under the head “Income from Salary.”
It is advisable to retain all documentation related to gratuity payments, particularly during a merger or shutdown, to ensure that the tax benefits are correctly claimed. A gratuity calculator can also help estimate the exempt portion of your payment before filing your return.
How to handle delays in gratuity payments
If the employer or successor company fails to release gratuity within 30 days, the employee is entitled to interest for the delay. You can submit a complaint to the labour commissioner or file an application with the controlling authority under the Payment of Gratuity Act. The law also provides penalties for employers who intentionally withhold gratuity. Understanding how to claim gratuity through formal channels ensures timely redressal and protects your rights as an employee.
Strengthening long-term savings beyond gratuity
While gratuity offers a valuable financial cushion at the end of service, it may not always be sufficient to meet all long-term needs. It is advisable to complement it with other secure investments that offer guaranteed returns. Fixed Deposits (FDs) are an ideal choice for employees seeking safety, predictable growth, and flexibility.
Bajaj Finance, for instance, provides digital FDs with competitive interest rates, flexible tenures ranging from 12 to 60 months, and the highest safety ratings—CRISIL AAA/STABLE and ICRA AAA/STABLE. You can use a gratuity calculator to estimate your payout and then invest a portion in Bajaj Finance FDs to generate regular income or reinvest for compounding growth. This helps you preserve your gratuity amount while continuing to build wealth safely.
Final thoughts
Knowing how to claim gratuity during a company shutdown or merger is crucial to safeguarding your legal rights and financial benefits. The law ensures that every eligible employee receives gratuity, regardless of organisational changes. By using a gratuity calculator and maintaining proper documentation, you can ensure accuracy and avoid underpayment. Investing a part of your gratuity in secure options such as Bajaj Finance Fixed Deposits allows you to continue growing your savings while maintaining complete peace of mind for the future.
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