Gratuity Benefit Limit, Tax-Free Withdrawal To Get Doubled: 5 Things To Know

The gratuity ceiling for all formal sector workers may soon be hiked to Rs 20 lakh. Recently, trade unions agreed on the proposal of doubling gratuity ceiling upon in discussions with labour ministry, according to Press Trust of India. They also came to an agreement to increase the tax exemption limit on gratuity to Rs 20 lakh, the report said. The proposed amendment was demanded to bring the ceiling amount to Rs 20 lakh in line with the Seventh Pay Commission's recommendations for central government employees. "Gratuity is very important. Gratuity, now they are getting Rs 10 lakh. I am going to increase Rs 20 lakh for all. I have done the tri-partite meeting. In the tri-partite meeting, employer and employee, both of them are agreeing," the Press Trust of India report cited Union Labour Minister Bandaru Dattatreya as saying. The relevant amendment for central government employees was notified on July 25, 2016 and the enhanced amount ceiling was made effective from January 1, 2016. 

Here are 5 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. 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.

(Read: Formal Sector Workers May Soon Be Eligible For Rs. 20 Lakh Tax-Free Gratuity)

2) 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.

3) An employer can however give higher gratuity than the amount under the prescribed formula.
(Also Read -Gratuity: How To Calculate, Rules, Eligibility and Formula)

4) For government employees, entire amount of gratuity received on retirement or death is currently exempted from income tax.

5) 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.