Important Decision On Gratuity Benefits Likely Today

The Union Cabinet is likely to consider today a draft amendment bill which seeks to double the ceiling of tax-free gratuity to Rs. 20 lakh under the Payment of Gratuity Act, news agency Press Trust of India reported. The bill also seeks to enable the central government to change the ceiling for tax-free gratuity after factoring in rise in income levels by an executive order bypassing Parliament route to amend the law. Last month, the central trade unions had agreed on the proposal in a tripartite consultation with the Labour Ministry. The employers as well as state representatives had also agreed to the proposal of raising the amount of gratuity to Rs. 20 lakh in the tripartite meeting held last month.

Here are 10 things to know:

1) 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.

2) An employee gets gratuity when he/she resigns, retires or is laid off. In case of death or disablement there is no minimum eligibility period.

3) After the amendment in the Act, formal sector workers would be eligible for up to Rs. 20 lakh tax-free gratuity.

4) The unions had demanded the removal of conditions asking to have at least 10 employees in an establishment and minimum five years of service for payment of gratuity.

5) The proposed amendment is being brought to bring the maximum ceiling amount to Rs. 20 lakh in line with the 7th Central Pay Commission’s recommendations as accepted by the government. The relevant amendment for central government employees was notified on July 25, 2016 and the enhanced amount ceiling was made effective from January 1, 2016.

6) The gratuity amount depends upon the tenure of service and last drawn salary. It is 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 it will be considered five years.

7) An employer can however give higher gratuity than the amount under the prescribed formula.

8) Trade unions had demanded that the amended provision regarding maximum amount should be made effective from January 1, 2016, as done in the case of central government employees. Besides that, the rate of 15 days wages for each completed year of service be raised to 30 days wages, the unions had said during the tripartite meeting.

9) For government employees, entire amount of gratuity received on retirement or death is currently exempted from income tax.

10) In case of others, current income tax rules on gratuity depend on whether employees are covered under the Payment of Gratuity Act, 1972 or not. For non-government employees covered under the Gratuity Act, the income tax exemption on any gratuity received is least of the following:

– Maximum amount specified by the government which is currently Rs. 10 lakh
– Last drawn salary X 15/26 X years of service
– Actual gratuity received

For non-government employees not covered under the Payment of Gratuity Act, the income tax exemption on any gratuity received is least of the following:

– Half month’s average salary for each completed year of service
– Maximum amount specified by the government which is currently Rs. 10 lakh
– Actual gratuity received