Rajya Sabha passed bill to double tax free gratuity The Rajya Sabha on Thursday passed amendments to the Payment of Gratuity Act, 1972 which will enable the Government to raise the tax-free gratuity limit from Rs 10 lakh to Rs 20 lakh. The amendments had previously been passed by the Lok Sabha, as we wrote here. The bill, which will now become the law after President signs it, also permits the government to make future changes in the gratuity limit and to increase the period for maternity leave that counts for the purpose of gratuity (currently 12 weeks) without approval from Parliament.  

What is gratuity?

If you look at your payslip or CTC statement, you will find an entry there for ‘Gratuity’ that you previously might not have noticed. Employees typically focus on ‘in-hand’ salary, dismissing such things as ‘Provident Fund (PF)’ and ‘Gratuity’ as just paper entries. However, this money is very real and ignoring it makes you lose out on a major part of your pay.

Gratuity is a component of your remuneration. It differs based on whether you are a government employee, a private sector employee covered by the Payment of Gratuity Act or a private sector employee not covered by the Act. The gratuity paid to government employees is tax-free, regardless of amount. The increase in this amount post the Pay Commission recommendations pushed labour unions to demand parity for the private sector and eventually led to the passage of this Bill. Gratuity is paid after five years of continuous service with an employer.

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 you 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.

Are you covered by the Payment of Gratuity Act?

The Payment of Gratuity Act, 1972 covers

  1. Workers in establishments of ten workers or more
  2. In specific industries such as mines, plantations, factories and railroads.

You can receive gratuity even if you are not covered by the Act. However, these amendments will not affect you and your tax-free gratuity limit will continue at Rs 10 lakh if you are not covered by the Act.

Neil Borate

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