Parliament passes bill that
lets govt double tax-free gratuity to Rs 20 lakh
Economic Time, March
22, 2018
The Parliament today
passed the Payment of Gratuity (Amendment) Bill which will
increase the ceiling of tax-free gratuity amount to Rs 20 lakh
from Rs 10 lakh.
Further, this will allow the government to increase the gratuity
ceiling from time to time without amending the law.
"A long awaited change, much expected to bring private sector
employees at par with their public sector counterparts as far as
gratuity ceiling is concerned. The gratuity amendment act, once
it comes into force after receiving presidential assent and
publication in the Official Gazette, would provide greater
defined benefit advantage for employees as it is likely that
income tax limits are increased as it has been the case in the
past. The amendment also gives flexibility to the Government to
extend the ceiling in the future by mere notification as opposed
to the requirement of an amendment," says Anshul Prakash,
Partner, Khaitan & Co.
It also allows the government to fix the period of maternity
leave for female employees as deemed to be in continuous service
in place of the existing 12 weeks.
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.
How much gratuity is tax exempt
The maximum gratuity amount that is tax exempt is applicable to
a person's entire career. What this means is that during your
entire working life, the tax-exempted gratuity amount you can
claim cannot exceed Rs 10 lakh currently in total from one or
more employers. The employers can pay more than what the
gratuity formula says if they feel so. The Payment of Gratuity
Act, 1972 does not prevent them from doing so. The Act only
prescribes the minimum limit which is exempted from tax.
Who will benefit
It appears that the proposed increase in tax-exempt gratuity
limit will immediately benefit mostly those with high salaries
as not many people would be earning a basic salary of over Rs
70,000 a month at present. However, if there are years to go for
your retirement or you just started working, this increase will
benefit most employees
At present, formal sector workers with five or more years of
service are eligible for Rs 10 lakh tax-free gratuity after
leaving job or at time of superannuation. With the passage of
the bill, the tax-free gratuity of Rs 20 lakh to organised
sector workers will now be at par with the central government
employees. After implementation of the seventh Central Pay
Commission, the ceiling of gratuity amount for central
government employees was increased from Rs 10 lakh to Rs 20 lakh.
The Payment of Gratuity Act, 1972, was enacted to provide for
gratuity payment to employees engaged in factories, mines,
oilfields, plantations, ports, railway companies, shops or other
establishments.
The law is applicable to employees, who have completed at least
five years of continuous service in an establishment that has 10
or more persons.
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