In a huge benefit to millions of private sector employees, Parliament recently approved the Payment of Gratuity (Amendment) Bill, 2018. After implementation of the Seventh Pay Commission, central government employees had not just received salary raises but the amount of their tax-free gratuity had also been doubled to Rs 20 lakh from Rs 10 lakh. However, private sector employees were as yet bereft of this benefit. The passage of the Gratuity Bill amendments paves way for private sector employees to avail tax-free gratuity up to Rs 20 lakh. But what does it really mean?
- Tax-free gratuity limit at Rs 20 lakh will reduce tax outgo, said expert
- Disposable income in hands post retirement will go up
- New legislation obviates need to go to Parliament for future enhancements
What is Gratuity Bill?
The Payment of Gratuity Act, 1972 is applicable to employees who have completed at least five years of continuous service in an establishment of 10 or more persons. The main purpose for enacting this Act is to provide social security to workmen after retirement, whether retirement is a result of superannuation, physical disablement or impairment of a vital part of the body. Therefore, the Payment of Gratuity Act, 1972 is an important social security legislation to the wage earning population in industries, factories and establishments.
What are the benefits of the recent amendments in Gratuity Act?
The bill ensures harmony among employees in the private sector and public sector undertakings/autonomous organisations under Government of India who are not covered under the Central Civil Services (Pension) Rules, 1972. These employees will be entitled to receive a higher amount of gratuity at par with their counterparts in government sector. Pension and gratuity of the employees retiring from central government departments is regulated by the CCS Rules.
"The Gratuity Bill provides superior defined benefits for employees. The higher limit will apply to tax-free amount payable to an employee. If an employee has already received the full Rs 10 lakh from previous employers, they can now accrue another Rs 10 lakh as tax-free gratuity benefit. In short, the substantial tax outgo will be reduced and also disposable income in hands post retirement will go up," Anil Rego, founder and CEO of Right Horizons, told NDTV.
"The earlier limit of Rs 10 lakh had not been changed for many years. It was required that the government take into account the inflation impact and enhance this limit," said Raghvendra Nath, managing director, Ladderup Wealth Management.
In addition, the Gratuity Bill also envisages amending the provisions relating to calculation of continuous service for the purpose of gratuity in case of female employees who are on maternity leave from 'twelve weeks' to such period as may be notified by the central government from time to time.
After enactment of the Act, the power to notify the ceiling of the amount of gratuity under the Payment of Gratuity Act, 1972 will stand delegated to the central government so that the limit can be revised from time-to-time keeping in view the increase in wage, inflation and future pay commissions, according to an official press release.
The new legislation obviates the need to go to Parliament for future enhancements, said Mr Nath. "This will make things easier and help gratuity keep pace with inflation," he added.
How To Calculate Gratuity
The amount of gratuity is directly proportional to the tenure of service, and to the last drawn salary. Gratuity is given at the rate of 15 days of last drawn salary for each year of service. The salary that is considered for the calculation of gratuity is the last drawn salary - it includes basic pay and dearness allowance. It is typically calculated according to the following formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.
"So an employee who has rendered services for 34 years will get gratuity equal to 17 months - which means that at time of retirement or resignation, he/she will get a salary of 17 months," said Dr DS Rawat, Chartered Accountant and Partner, Bansal and Company.