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How Is Gratuity Calculated? Gratuity Limit Set To Get Doubled

Experts have welcomed the move to increase the gratuity limit.

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How Is Gratuity Calculated? Gratuity Limit Set To Get Doubled

Gratuity is a benefit received by an employee for services rendered to an organisation.

In a move that will benefit workers of private and public sector companies, the Cabinet on Tuesday approved the introduction of Payment of Gratuity (Amendment) Bill, 2017, which seeks to double gratuity limit for formal sector employees to Rs 20 lakh, from the current limit of Rs 10 lakh. The new limit will come into force once the Payment of Gratuity Act is amended. "The Union Cabinet chaired by the Prime Minister Narendra Modi has given its approval for introduction of the Payment of Gratuity (Amendment) Bill, 2017 in the Parliament," said an official statement on Tuesday. 

Experts have welcomed the move. Anshul Prakash, partner at law firm Khaitan & Co, said: "Central government's move to amend and increase the gratuity ceiling resulting in the statutory cap being doubled, is a welcome step from an employee's perspective. Earlier, employers could limit their liability to the statutory cap of Rs 10 lakh even if the calculation of gratuity for an eligible employee resulted in a higher figure."
 

How gratuity is calculated


According to the current formula for formal sector workers, the gratuity amount depends upon the tenure of service and last drawn salary. It is typically 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 as five years.

An employer can however give higher gratuity than the amount under the prescribed formula.
 

Other Things To Know About Gratuity Benefits


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. The Gratuity Act applies to establishments employing 10 or more persons.  The Gratuity Amendment Bill seeks to make formal sector workers eligible for a tax-free gratuity of up to Rs 20 lakh.

The main purpose for enacting this Act is to provide social security to workers after retirement, whether retirement is a result of the rules of superannuation, physical disablement or impairment of any vital part of the body.

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"Considering the inflation and wage increase even in case of employees engaged in private sector, the government is of the view that the entitlement of gratuity should be revised for employees who are covered under the Payment of Gratuity Act, 1972," the government statement said. 

The move to amend gratuity rules for formal sector workers comes after the limit for central government employees was hiked to Rs 20 lakh, according to recommendations of the 7th pay commission. The relevant amendment for central government employees was notified on July 25, 2016 and the enhanced ceiling amount made effective from January 1, 2016. (With Agency Inputs)

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