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The Parliament yesterday passed the long-awaited amendment Bill for Payment of Gratuity Act. Let's understand what does this mean for you

Gratuity amendment act

What's the news?

The Bill enhances the free tax limit for gratuity from Rs 10 lakh to Rs 20 lakh. It also allows the Government to raise the ceiling on gratuity through a simple notice rather than by amendment of law.

What is gratuity?

 

Gratuity is the amount paid by an employer to an employee at the end of service as a token of gratitude. It is governed by the Payment of Gratuity Act (1972). The Act makes payment of gratuity mandatory by employers who have a staff of 10 or more. Gratuity is computed as 15 days’ pay for each year of service. Till now it was exempt from tax up to a maximum of Rs 10 lakh, which the new amendment has increased to 20 lakh.

The new amendment

Apart from raising the ceiling on gratuity, the amendment also permits the Government to raise the ceiling from time to time without amending the Act. In an earlier amendment on 25 July 2016, the upper limit had been raised to Rs 20 lakh for Central Government employees. The new amendment applies this ceiling to all employees of both public and private sector.

Who does it impact?

The new amendment directly affects private sector employees who will now find themselves on par with their Central Government counterparts. It also affects State Government and PSU employees, for whom the ceiling was Rs 10 lakh.

Related: Tax Benefits after Retirement

Computation and payment of gratuity

Gratuity is based on the principle of gratitude for long service. As such it is payable to any employee who has put in a minimum of five years of service. It is paid at the time of retirement, superannuation, death, or resignation due to disability. Superannuation is a pension program where regular payment is made by an employee towards their retirement. This is also applicable to employees who have completed 5 years of continuous service in the same company. 

Therefore, if you simply jump jobs, you will not be entitled to gratuity from your erstwhile employer. The amount is equivalent to 15 days’ pay per year of service as under:

Gratuity = [(Basic Pay + Dearness Allowance) x 15 days x No of years served in a company] / 26

Related: What is National Pension System and how it works

The basis of computation is the last drawn salary or salary at the time of computation. Service is rounded off to the nearest full year. The employer pays the amount as part of the employee’s retirement benefits. The condition of five years’ minimum service period may be waived in case of death or disability.

Related: 7th Pay Commission: What you must know about it? 

Implications of the new amendment

Gratuity is exempt from tax. The exemption is applicable for the entire working life of the employee, that is, it is applicable to the total amount of gratuity a person may receive in his or her lifetime. An employee cannot claim more than Rs 10 lakh (now Rs 20 lakh) as tax exemption under the Gratuity Act. The Act does not prohibit employers from paying more than the provisions of the Act, but according to the new amendment, any amount in excess of Rs 20 lakh will be taxable.

Related: Alternative sources of income if you don’t have a pension

How does it affect you?

The amendment came into effect immediately. With salaries and living standards touching an unprecedented high, this exemption comes as a relief to those with salaries in the higher income bracket. Even if you do not belong to that group; if you’re at the threshold of your career or barely halfway through, it is highly probable that you may become eligible at some point. The change does away with the need for a Bill to be passed before the limit can be raised again. This gives hope that the Government may further raise – and hopefully not reduce – the limit in future. So don’t lose hope even if the new amendment doesn’t directly affect you.

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