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Gratuity Rules Set To Change. What It Means For Employees

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.
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For government employees, entire amount of gratuity received on retirement is not taxable.
For government employees, entire amount of gratuity received on retirement is not taxable.

Highlights

  1. Government likely to soon amend Gratuity Act to double gratuity ceiling
  2. Proposal to raise gratuity from Rs 10 lakh to Rs 20 lakh
  3. Gratuity is paid to employees after completion five years of service

Labour Minister Bandaru Dattatreya has said that the government is likely to soon amend the Gratuity Act to enhance the ceiling of gratuity to Rs 20 lakh from Rs 10 lakh. "After clearance from the Cabinet, it will come to Parliament. This time, we have proposed to increase the gratuity from Rs 10 lakh to Rs 20 lakh," the minister said. 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 ceiling amount 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

(Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month, not the day, of retirement)

These tax laws will change once the Gratuity Act is amended.

(With agency inputs)



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