The Government has decided to hike the tax exemption limit for gratuity for formal sector workers from Rs 10 lakh to Rs 20 lakh. The government is likely to pass an amendment to the Payment of Gratuity Act, 1972 to make the same in effect. The bill was presented in Lok Sabha during the winter session of Parliament.
Gratuity is a lump sum that an employer pays you when your employment ends. Your employment may end due to various causes including retirement, termination and even death. The tax exemption for gratuity is available in all of these cases.
Gratuity paid to Central and State Government employees is fully tax exempt. For private sector employees, the tax exemption differs slightly depending on whether or not your employer is covered by the Payment of Gratuity Act. For workers covered by this Act, the tax-free gratuity limit has been doubled from Rs 10 lakh to Rs 20 lakh. For other employees, the limit of Rs 10 lakh stays.
The Payment of Gratuity Act applies to establishments in specific industries which employ more than 10 people. To be eligible for gratuity under this Act, you also need to have completed at least five years with your employer.
If you are not covered by this Act, the tax exemption for gratuity is given for the least of the following:
Actual gratuity received
Rs 20 lakh (this was earlier Rs 10 lakh)
Half month’s salary (taking the average of the last 10 months) multiplied by the number of years of service.
Eg: If your average salary in the last 10 months of service is Rs 60,000 and you have worked for 20 years, the tax-free gratuity limit would be 60,000*20*0.5 = Rs 6 lakh. However, if you worked for 19 years and 11 months, your gratuity will still be Rs 6 lakh.
For workers who are covered by the Payment of Gratuity Act, the conditions are the same. However for such workers:
The final salary rather than the 10 months’ average is considered.
Employment for 6 months or more in a year is considered as a full year as against the requirement for full years to be completed for other workers.
Eg: If your final month’s salary is Rs 60,000 and you have completed 19.5 years of service, you will get a tax-free gratuity of 60,000*20*0.5 = Rs 6 lakh.