The Union Cabinet on Tuesday approved an amendment Bill that seeks to double the gratuity ceiling to ₹20 lakh from ₹10 lakhfor employees in the private and public sector, as well as autonomous organisations, brining it on a par with Central government employees.
The Cabinet also gave its approval for introduction of the Payment of Gratuity (Amendment) Bill, 2017 in Parliament that seeks to amend the Payment of Gratuity Act, 1972, which applies to establishments employing 10 or more persons.
7th Pay Commission: Gratuity Ceiling To Leap From Rs 10 Lakh To Rs 20 Lakh
“The amendment will put the maximum limit of gratuity of employees of the private sector as well as public undertakings and autonomous organisations under the government who are not covered under Central Civil Services (Pension) Rules, at par with central government employees, which is ₹20 lakh,” an official release said. Before implementation of the 7th Central Pay Commission, the ceiling under Civil Services (Pension) Rules, 1972, was ₹10 lakh.
This amendment, once effective, will also provide higher tax benefit to those employees who are covered under the Payment of Gratuity Act and who are entitled to receive the enhanced gratuity amount. Gratuity received by government employees is completely exempt from income tax, whereas gratuity received by non-government employees are exempt subject to certain ceiling limits. Gratuity amount of a non-government employee, under the Act is calculated at the rate of 15 days salary (based on last drawn salary), for each number of completed years of service. However, the maximum amount that can be paid shall not exceed Rs 10 lakh, which has now been proposed for enhancement to Rs 20 lakh. Even though there is an upper limit, an employee has the right to receive a higher amount under any award or agreement or contract with the employer (better terms of employment). With the proposed amendment, an employee who has rendered 20 years of service with a monthly salary of Rs 1.50 lakh (at the time of retirement), would now be eligible to receive Rs 17.31 lakh (15/26 x 1,50,000 x 20 years) as gratuity, and the entire amount of Rs 17.31 lakh will now be tax exempt. Again, with the proposed change, an employee falling in the tax bracket of 30% could save taxes approximately up to Rs 3 lakh on gratuity payments at the time of retirement.
“It is therefore proposed to empower the central government to enhance the period of existing twelve weeks to such period as may be notified by it,” the Statement said.
With respect to gratuity, the amount is calculated on the basis of a formula which is 15 days of wages for each year of completed services, subject to the ceiling of Rs 10 lakh. This limit was fixed in 2010.
Generally, the ceiling under the Act follows that of the Central Pay Commission recommendations.
“Therefore, considering the inflation and wage increase even in case of employees engaged in private and public sector, the entitlement of gratuity is also required to be revised for employees who are covered under the Act.
“It has also been proposed to empower the central government to notify the ceiling proposed, instead of amending the said Act, so that the limit can be revised from time to time keeping in view the increase in wage and inflation, and future Pay Commissions,” the Statement said