Good news for private sector employees. Now they too can hope for a revision in their gratuity ceiling from Rs 10 lakh to Rs 20 lakh. The Union Cabinet, chaired by Prime Minister Narendra Modi, on Tuesday approved the introduction of the Payment of Gratuity (Amendment) Bill, 2017 in the Parliament. The Amendment seeks to increase the maximum limit of gratuity of employees in the private sector at par with the Central government employees.
Talking about this development, Kuldip Kumar, Partner and Leader for Personal Tax at PwC, said, “This move will greatly benefit the middle management and senior management employees. With the ceiling on payment of Gratuity being raised, they will receive a higher amount of gratuity as tax-free compensation. The only thing that one will have to watch out for is whether companies that include gratuity in CTC will restructure salaries or not.”
Here are five things to know about gratuity, passage of the Gratuity Bill by the government and how it will benefit private sector employees:
1. Gratuity is a sum of money which forms part of one’s salary. It is paid by the employer to their employee on rendering services for not less than 5 years in the same company. Mostly the employees save the gratuity amount for their retirement purpose only and the amount is also exempt from taxation under the I-T Act for state government employees, Central government employees or any local authority receiving the amount under the Gratuity Act 1972.
2. It may be noted that the Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons. The main purpose for enacting this Act is to provide social security to workmen after retirement, whether retirement is a result of the rules of superannuation, or physical disablement or impairment of vital part of the body. Therefore, the Payment of Gratuity Act, 1972 is an important social security legislation to wage earning population in industries, factories and establishments.
3. Considering the inflation and wage increase even in case of employees engaged in the private sector, the government is of the view that the entitlement of gratuity should be revised for employees who are covered under the Payment of Gratuity Act, 1972. Accordingly, the government initiated the process for amendment to the Payment of Gratuity Act, 1972.
4. The present upper ceiling on gratuity amount under the Act is Rs 10 lakh. With implementation of the 7th Central Pay Commission, the gratuity ceiling for government servants got revised from Rs 10 lakh to Rs 20 lakh with effect from January 1, 2016. The amendment seeks to revise the ceiling for employees in the private sector too, considering inflation and wage increase. The amendment will put the maximum limit of gratuity of employees of the private sector as well as public undertakings and autonomous organisations under the government who are not covered under Central Civil Services (Pension) Rules, at par with Central government employees, which is Rs 20 lakh.
5. However, while the increase in the gratuity ceiling from Rs 10 lakh to Rs 20 lakh will benefit everyone, this question may arise in the mind of many people that how many years of service will be required under different salary levels to reach the proposed maximum gratuity ceiling limit? Amarpal S. Chadha, Tax Partner and India Mobility Leader, EY, explains this with the following example:
“A person retiring with an annual salary (wages as per Payment of Gratuity Act, 1972) of Rs 10 lakh should have worked for approximately 41 years in order to reach the revised maximum gratuity ceiling limit of Rs 20 lakh, whereas a person with an annual salary (wages as per POGA) of Rs 20 lakh at the time of retirement would achieve the maximum gratuity limit of Rs 20 lakh in approximately 20 years of service,” he says.