Lok Sabha passes gratuity bill doubling tax-free limit to Rs 20 lakhThe upper house of Parliament, Lok Sabha, on Thursday passed amendments to the Payment of Gratuity Act, 1972, which seeks to double the limit of tax-free gratuity in the private sector from Rs 10 lakh to Rs 20 lakh. Now Rajya Sabha needs to pass the bill, after which it will come into effect.

The bill, which also empowers the government to fix the period of maternity leave, has sought to count maternity leave as a continuation of service in the calculation of gratuity. 

The amendments will also allow the Central Government to make future revisions to the tax-free limit without further amendments or needing approval from Parliament.

Labour Minister Santosh Kumar Gangwar moved the bill in the Parliament.

Note that these changes only apply to workers covered by the Payment of Gratuity Act, 1972. The act was enacted to provide for gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. 

What is gratuity?

Gratuity is a lump sum amount paid to you at the end of your service with a particular employer. This may happen due to resignation, retirement, removal, death or any other cause.

However, you need to have completed at least five years with an employer to be entitled to this money.

How is gratuity calculated for tax purposes?

It is the least of:

  1. Actual gratuity received
  2. Rs 10 lakh (now increased to Rs 20 lakh)
  3. Half month’s salary multiplied by the number of years of service

If you are covered by the Payment of Gratuity Act, 1972, your final salary is considered for point number 3 in this calculation. If are not covered by the Act, the average of 10 months salary is taken. Also, employment for more than six months is taken as a full year if you are covered by the Act. This benefit is not available if you are not covered by the Act.

Who does this bill apply to?

You must be an employee covered by the Payment of Gratuity Act, 1972. This means that you are

  1. A formal sector employee
  2. Working in an establishment with 10 employees or more.
  3. Working in an industry that is covered by the Payment of Gratuity Act. Examples include factories, mines, plantations, railways and oilfields.

If you are a Central or State Government employee, your gratuity amount is exempt without any upper limit.

If you are a private sector employee, not covered by the Payment of Gratuity Act, your tax-free gratuity amount will continue to be capped at Rs 10 lakh.

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Tax-Free Gratuity Limit To Be Doubled To Rs 20 Lakh

Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.