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Payment of Gratuity (Amendment) Bill passed: Tax free gratuity limit doubled to Rs 20 lakh; know how employees will benefit

By FnF Correspondent | PUBLISHED: 22, Mar 2018, 17:02 pm IST | UPDATED: 22, Mar 2018, 19:11 pm IST

Payment of Gratuity (Amendment) Bill passed: Tax free gratuity limit doubled to Rs 20 lakh; know how employees will benefit New Delhi: Are you a private sector employee? Here’s good news for you. Now you will be able to receive tax-free gratuity of up to Rs 20 lakh as against Rs 10 lakh earlier. Parliament today passed the Payment of Gratuity (Amendment) Bill, which sought to double the ceiling of tax-free gratuity to Rs 20 lakh and also empower the government to fix tax-free gratuity amount as well as period of maternity leave with an executive order. The Bill was passed by the Rajya Sabha today, while Lok Sabha had already passed it last week.

In a move that will benefit millions of workers of private and public sector companies, the Rajya Sabha on Thursday passed the Payment of Gratuity (Amendment) Bill, 2017. Now, the government will be able to enhance the ceiling of tax-free gratuity to Rs. 20 lakh from the existing Rs. 10 lakh for employees under the Payment of Gratuity Act, news agency IANS reported. It means that it your tax liability will be nil in case you receive any amount upto Rs. 20 lakh as gratuity.

After the Amendment bill comes to force, the government may raise the limit of Rs. 20 lakh further to increase the cap in gratuity amount as and when the need arises without having to change the law. Also, the amendment bill will allow the government to fix the period of maternity leave for female employees.

It may be noted that after the implementation of the Seventh Pay Commission report, the ceiling of tax-free gratuity amount for Central government staff was doubled to Rs 20 lakh. Following that, the government was making all efforts to do this for the private sector employees also.

What is gratuity:
Gratuity forms part of one’s salary and is paid by an employer to an employee after rendering services for at least five years in the same organisation. Gratuity is, thus, a kind of benefit which is provided by the employer to its employee. Gratuity is mostly saved for retirement purpose only and its amount is tax-free under the Income Tax Act.

How to calculate Gratuity:
Amount of gratuity is directly proportional to the tenure of service, and also to the last drawn salary. The gratuity is given at the rate of 15 days of last drawn salary for each year of service. And the salary that is considered for the calculation of gratuity is the last drawn salary that includes basic pay and dearness allowance. It is typically calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. According to this formula, the time period of over six months or more is considered as one year. This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit. On the other hand, if the service period is five years and five months, for gratuity calculation will be considered as five years.

How will private employees now get benefited:
Experts believe that the passage of the Payment of Gratuity (Amendment) Bill by Parliament will hugely benefit the middle and senior management employees who are getting higher salaries. With the ceiling on Gratuity having been raised, they will now receive a higher gratuity amount as tax-free compensation, at par with Central government employees, which is Rs 20 lakh.

How many years it will take to reach the proposed maximum gratuity ceiling limit:
According to tax experts, a person who retires with a salary of Rs 10 lakh per annum needs to work for about 41 years to reach the revised limit of Rs 20 lakh. Similarly, a person whose annual salary is Rs 20 lakh at the time of retirement will achieve the Rs 20-lakh gratuity limit in about 20 years of service.

Seventh Pay Commission:
After the implementation of the 7th Pay Commission, the ceiling of gratuity amount for central government employees was doubled to Rs. 20 lakh. The Payment of Gratuity (Amendment) Bill is in tandem with the new pay commission.

Maternity Leave benefits:
The amendment to the payment of gratuity law comes in the backdrop of Maternity Benefit (Amendment) Act, 2017 enhancing the maximum maternity leave period to 26 weeks. So, it means the maternity leave of 26 weeks will be considered as continuation of service for the purpose of calculating the amount of gratuity.

When is gratuity applicable:
Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. The Gratuity Act applies to establishments employing 10 or more persons.

Who are Eligible:
The Payment of Gratuity Act, 1972 allows for the payment of gratuity to employees in any establishment, factory, mine, oil field, plantation, port, railways, company, or shop employing 10 or more workers.