Gratuity up to Rs 20 lakh may become tax-free soon

Prakash Priyadarshi

Payment of Gratuity (Amendment) Bill, 2017, which will make formal sector workers eligible for tax-free gratuity up to Rs 20 lakh, is likely to be introduced in the forthcoming budget session.

According to a labour ministry source, the government wants to increase the limit of tax-free gratuity from Rs 10 lakh to Rs 20 lakh for workers in the organised sector.

Sources told Zee Business that once the bill is passed by the Parliament, the government can increase the quantum of tax free gratuity through a notification. Currently, workers in the organised sector with five or more years of service are eligible for Rs 10 lakh tax-free gratuity after leaving employment or at the time of superannuation.

The bill was introduced in the Lok Sabha by labour minister Santosh Kumar Gangwar during the winter session of Parliament in December 2017.

What is Payment of Gratuity Act

The Payment of Gratuity Act 1972 provides for the payment of gratuity to employees engaged in industries including mines, oilfields, plantations, shops, factories, amongst others. The tax-free gratuity limit was raised to Rs 10 lakh through the Payment of Gratuity (Amendment) Bill, 2010.

The law is applicable to employees, who have completed at least five years of continuous service in an establishment that has ten or more employees. The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons.

The Payment of Gratuity Act, 1972 is an important social security legislation to wage earning population in industries, factories and establishments.

The gratuity amount is calculated on the basis of a formula which is 15 days of wages for each year of completed services, subject to the ceiling of Rs 10 lakh. This limit was fixed in 2010.

After implementation of the 7th Central Pay Commission, the ceiling of gratuity amount for central government employees has been increased from Rs 10 lakh to Rs 20 lakh. Generally, the ceiling under the Act follows that of the Central Pay Commission recommendations.