Article: Embracing double tax-free gratuity

Compensation & Benefits

Embracing double tax-free gratuity

The Payment of Gratuity (Amendment) Bill 2017 is all set to increase the ceiling from Rs.10 lakh to Rs 20 lakh for government and private sector employees.
Embracing double tax-free gratuity

The Payment of Gratuity Act, 1972 is applicable to all organizations and firms employing 10 or more employees. It is an important form of social security in which a part of salary is received by an employee from the employer in gratitude for the services offered by the employee in the company.  It is derived from the word ‘gratuitous’, which means ‘complimentary’. 

Gratuity is calculated using a simple formula i.e. Last drawn salary x 15/26 x number of years of service. Salary here means basic pay plus DA (dearness allowance) and 15/26 means 15 working days’ pay of the 26 days of pay a month.

As per the current Act, Gratuity is payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years on his superannuation or on his retirement/resignation or on his death and disablement due to accident or disease. As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full-time service with the employer (minimum 240 days a year).

Payment of gratuity is a statutory requirement and failure to pay gratuity amount by the employer to an employee is subjected to punishment ranging from fines to imprisonment of six months that can extend to two years.

Change in the Gratuity Entitlement

The present upper ceiling on gratuity amount under the Act is Rs. 10 Lakh. As per the current Act, even if an employee accumulates more than Rs. 10 lakh as gratuity contribution, the withdrawal is capped at Rs. 10 lakh and the rest is paid out after deduction of taxes.

Keeping pace with the rising prices, wage and labour reforms, the Government is of the view that the entitlement of gratuity should be revised to Rs. 20 lakh capping for employees who are covered under the Payment of Gratuity Act, 1972. And hence, the Government initiated the process for amendment to Payment of Gratuity Act, 1972. 

Finally, the Union Cabinet gave the approval to the introduction of the Payment of Gratuity (Amendment) Bill, 2017 in the Parliament, seeking to double tax-free gratuity for private sector and government employees to Rs. 20 lakh. However, this will only come into effect once the Payment of Gratuity Act is amended.

It is predicted that the hike in gratuity post implementation may boost consumption in the economy. “Since there is less investment, recovery in Indian economy will be consumption-led this year. And decisions like this will support the consumption story, although mildly,” quoted the chief economist D.K. Joshi.

However, the ceiling change has nothing to do with the tenure rule of five years. There is no authentic information available on whether the cabinet approved any change to the gratuity payment tenure rules, though there have been demands to reduce this threshold from five to three years.


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Topics: Compensation & Benefits, #National

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