Tax free gratuity limit doubled to Rs 20 lakh; here’s how employees will benefit

By: | Updated: March 22, 2018 6:43 PM

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.

gratuity, gratuity limit doubled, Rs 20 lakh, Parliament, Payment of Gratuity (Amendment) Bill, Rajya Sabha, Lok Sabha, maternity leave 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.

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 will 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.

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.

The Payment of Gratuity Act, 1972 applies to organisations where 10 or more persons are employed. The main purpose of this Act is to provide social security to employees after retirement.

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 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.

Giving more details, financial experts said that employees who have been working for more than 5 years in a particular organization are entitled to gratuity when they quit the organization or on superannuation. The Payment of Gratuity (Amendment) Bill, 2017 passed today raised the maximum gratuity that you can get from Rs 10 lakh to Rs 20 lakh.

“This increase will benefit employees who have just joined the workforce the most. For example, if you joined the workforce at the age of 25 for a basic salary of Rs 20,000 per month and assume an average annual salary increase of 7%, you would cross the Rs 10 lakh mark after approx. 22 years of service. By the time you have 25 years of service, your gratuity would be in the range of Rs 15 lakh. And this would be completely tax-free. So, if you have recently started working and are looking to a long and uninterrupted service, this increased limit would help you,” said Adhil Shetty, CEO, Bankbazaar.com.

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