Tax-Free Gratuity Limit Set Go Up To Rs 20 Lakh: 5 Things To Know

The Payment of Gratuity Amendment Bill 2017 is likely to be passed in the forthcoming Budget session of Parliament, which will make formal sector workers eligible for a tax-free gratuity of Rs 20 lakh, news agency Press Trust of India reported citing sources. The Budget session of Parliament will begin later this month. The bill was introduced in the Lok Sabha in winter session of Parliament last month. "The government wants to provide tax-free gratuity of Rs 20 lakh to organised sector workers at par with Central government," the agency reported, citing sources. Gratuity calculation is based on the tenure of service and last drawn salary.

Here are five things to know about payment of gratuity:

1) The Union Cabinet had in September last year given its approval for introduction of the Payment of Gratuity (Amendment) Bill in the Parliament. The amendment will increase the maximum limit of gratuity of employees, in the private sector and in public sector undertakings/autonomous organisations under government, bringing them at par with central government employees.

2) Currently, formal sector workers with five or more years of service are eligible for a tax-free gratuity up to Rs 10 lakh after leaving job or at time of superannuation.

3) The move to amend gratuity rules for formal sector workers comes after the limit for central government employees was hiked to Rs. 20 lakh, according to recommendations of the 7th pay commission. The relevant amendment for central government employees was notified on July 25, 2016 and the enhanced ceiling amount made effective from January 1, 2016.

4) How gratuity is calculated: According to the current formula for formal sector workers, the gratuity amount depends upon the tenure of service and last drawn salary. It is typically 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 as five years.

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

5) The main purpose for enacting this Act is to provide social security to workers after retirement, whether retirement is a result of the rules of superannuation, physical disablement or impairment of any vital part of the body. The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons.