The Centre has approved an amendment bill that seeks to increase the maximum limit of gratuity for private and public sector employees from `10 lakh to Rs 20 lakh. This amendment, once effective, will make employees in the private sector as well as public undertakings and autonomous organisations under the government, not covered under the Central Civil Services (Pensions) rules, eligible to receive a higher amount of gratuity. Parity with govt employees This change would also bring parity with respect to the maximum limit of gratuity applicable for central government employees under the Central Civil Services (Pension) Rules, 1972. The government had increased the gratuity ceiling limit from Rs 10 lakh to Rs 20 lakh for government employees with effect from January 1, 2016. It has now initiated this amendment for employees in the private sector and public sector as well, considering inflation rates and general increase in wages. The Payment of Gratuity Act, 1972 which has been enacted to provide social security to employees after retirement is applicable to enterprises with ten or more employees. This enactment provides for payment of gratuity on account of retirement \/superannuation\/resignation\/any physical impairment during the employment. Further, as per the rules, an employee is required to complete five years of continuous service (subject to certain exceptions) to be eligible for gratuity. Higher tax benefit This amendment, once effective, will also provide higher tax benefit to those employees who are covered under the Payment of Gratuity Act and who are entitled to receive the enhanced gratuity amount. Gratuity received by government employees is completely exempt from income tax, whereas gratuity received by non-government employees are exempt subject to certain ceiling limits. Gratuity amount of a non-government employee, under the Act is calculated at the rate of 15 days salary (based on last drawn salary), for each number of completed years of service. However, the maximum amount that can be paid shall not exceed Rs 10 lakh, which has now been proposed for enhancement to Rs 20 lakh. Even though there is an upper limit, an employee has the right to receive a higher amount under any award or agreement or contract with the employer (better terms of employment). With the proposed amendment, an employee who has rendered 20 years of service with a monthly salary of Rs 1.50 lakh (at the time of retirement), would now be eligible to receive Rs 17.31 lakh (15\/26 x 1,50,000 x 20 years) as gratuity, and the entire amount of Rs 17.31 lakh will now be tax exempt. Again, with the proposed change, an employee falling in the tax bracket of 30% could save taxes approximately up to Rs 3 lakh on gratuity payments at the time of retirement. Another way to look at this change would be that a person retiring with an annual salary (wages as per the Gratuity Act) 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 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. This is a good news for employees in private and public sector. One has to wait and see how employers implement this change into the salary structure of the employees. The author is tax partner & India Mobility Leader, EY India. With inputs from Shanmuga Prasad, senior tax professional, EY.