CA Ajay Joshi

Payment of Gratuity (Amendment) Bill, 2017 Passed – Exemption Limit Rs. 20 lakhs – Big Relief to salaried Tax Payers

 The Payment of Gratuity (Amendment) Bill, 2017 has been passed by parliament on 22.3.2018, paving the way for doubling the limit of tax free gratuity to Rs 20 lakh and empowering the government to fix the ceiling of the retirement benefit through an executive order. The Rajya Sabha passed the bill, which was approved by the Lok Sabha on 15.3.2018.  Besides enabling the central government to fix the ceiling of tax free gratuity, the bill will also empower it to fix the period of maternity leave through executive order. The Payment of Gratuity (Amendment) Bill, 2017 was introduced by labour minister Santosh Kumar Gangwar in the Lok Sabha on 18.12.2017.

The bill ensures harmony among st employees in all the sectors viz, the private sector and Public Sector Undertakings/Autonomous Organizations under Government who are not covered under CCS (Pension) Rules. The employees of private sector and Public Sector Undertakings/ Autonomous Organizations under Government will be now entitled to receive higher amount of gratuity at par with their counterparts in the Government sector.

The revised upper ceiling on gratuity amount under the Payment of Gratuity Act is Rs. 20 Lakh which was Rs. 10 lakhs earlier. For Central Government employees the provisions with regard to gratuity are also similar under Central Civil Services (Pension) Rules, 1972. Before implementation of seventh Pay Commission, the ceiling under CC S (Pension) Rules, 1972 was Rs. 10 lakh which was raised to Rs. 20 lakhs by seventh Pay Commission.

Tax ability:

Under the present structure the tax ability of gratuity depends on the recipient’s job. In case of Government employees there will be no tax on the gratuity. In case of Private sector employees, they are divided as:

  • Private employees covered under the Payment of Gratuity Act, 1972.
  • Private employees not covered under the Payment of Gratuity Act, 1972.

In case of private sector employees covered under the Payment of Gratuity Act, 1972, any gratuity received is tax exempt to the extent of least of the following:

  • Statutory limit of Rs. 20 Lakh (Maximum limit/ Government notified amount)
  • Last drawn salary * 15/26 * No. of completed years of service.
  • Actual Gratuity.

If the gratuity exceeds the limit mentioned above, then it becomes taxable.

 For private employees not covered under the Payment of Gratuity Act, 1972, any gratuity received is tax exempt to the extent of least of the following:

  • Statutory limit of Rs 20 Lakh .
  • Gratuity = Average salary x one half x No. of years of service.
  • Actual gratuity received.

If a person has received gratuity before and if any exemption was allowed for the same, then the exemption to be allowed during the retirement year gets reduced to the extent of exemption already allowed, subject to the overall limit of Rs. 20 lakhs.

Any gratuity amount received by an employee (Government or Private sector employee) during his service is taxable. But when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private sector employees.

In case of Government Employees the entire gratuity amount that he/she receives on retirement or on death is exempted from paying any Income tax. Gratuity received on retirement (or) during service period is taxable under the head “Salary.” It should be shown under the head of “Salaries”. This is applicable for both Government as well as Private sector employees. The Gratuity received by the legal heir (or) nominee is not taxable if the gratuity becomes due/sanctioned after the death of the employee. If the gratuity amount becomes due and paid before the death of the employee then it is taxable under the head ‘Income from Other Sources.’

The salary for above calculation includes basic salary received by the employee and the dearness allowance and commission received if any. The average salary is taken as the average of the salary of last 10 months immediately preceding the last working month.

The service tenure is based on whether the organization is covered under the Act or not. If the organization is covered under the Act, the employee’s service tenure will be considered for a full year, provided he has worked for more than six months, but less than a year. If the organization is not covered under the Act then the tenure of the employee whose services exceeds six month.

As per CBDT’s letter dated 19.06.1973 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief under section 89(1) of the Income tax Act.

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax.

The Bill has great relief for female employees. It also envisages to amend 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. The proposal comes against the backdrop of the Maternity Benefit (Amendment) Act, 2017 enhancing the maximum maternity leave period to 26 weeks.

After enactment of the Amended Act, the power to notify the Gratuity ceiling amount under the Payment of Gratuity Act, 1972 shall stand delegated to the Central Government. This will enable the Government to revise limit from time to time keeping in view the increase in wage and inflation and decisions of future pay commissions.

The Payment of Gratuity Act, 1972 was enacted to provide for gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. The law is applicable to employees, who have completed at least five years of continuous service in an establishment that has ten or more persons.

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23 responses to “Gratuity Exemption Limit Rs. 20 lakhs – Big Relief to salaried Tax Payers”

  1. Vijay says:

    I am retired on 31-08-2018 please advice me whether I am elegible for 20 lakh exemption of gratuity limit

  2. Chidambar Bhaskar Samant says:

    How to decide private sector employees covered
    under the payment of gratuity act,1972
    and
    Private sector employees not covered under
    The payment of gratuity act, 1972
    To determine tax exempted gratuity amount.

  3. Chidambar Bhaskar Samant says:

    How to decide, private sector employees covered under the payment of 6

  4. Niranjan says:

    My brother was retired from psu on Nov 2017 and get gratuity amount 20 lakhs. Employer exempted 10 lakhs from tax and another 10 lakhs was taxable. So whether he can clame this amount 10 lakhs for tax exemption

  5. K S GANESH says:

    i RETIRED I ON 30.4.17 FROM PSU BANK AND RECD GRATUITY OF RS 13.01 LACS. WHETHER IT IS FULLY EXEMPT OR ONLY UPTO RS 10 LACS. KINDLY CLARIFY

  6. Bimal Kumar Roy says:

    I shall retired from (WBEIDC Ltd) a govt.of West Bengal Undertaking Company on 28/02/19 and I shall received the gratuity as per the calculation given below.
    (Basic + DA) = Y
    Y/26 x 600 days = 19,78,000/-
    Please confirm whether I shall get the Tax Exemption
    for upper limit of Rs20,00,000/- or not.

  7. Virinder pal singh says:

    I retired from bank on 30/06/2017, got Gratuity 1012584/, Taxable gratuity shown 18584/
    In view revision in gratuity limit Notification on 29/03/2018. Gratuity in excess of 10 lacs will be taxable.

  8. E. Velayudhan says:

    Dear Sir,
    I retired from a public sector bank on 31.03. 2017.
    I was paid gratuity for Rs.1262800 in April 2017. Bank has deducted TDS on the gratuity amount of Rs.262800/- Can I claim the TDS amount deducted while filing the ITR for FY 2018 as the tax exemption limit for gratuity has been increased from Rs.10.00lacs to Rs.20.00 lacs? Kindly reply.

    E. Velayudhan

  9. A L Jha says:

    I retired from PSU in Nov, 2017 and received a Gratuity of Rs.20,00,000/- (Twenty Lakhs). My employer has deducted income tax on 10,00,000/- (ten Lakhs). Will it be exempted in full or not. Can I claim refund.

  10. Gopal says:

    I am also sailing in the same boat. Awaiting reply from experts. I also retired in May 2017. Inform the applicable maximum limit of exemption on gratuity received. Urgent please.

  11. Chidambar Bhaskar Samant says:

    Sir, i would like to have a copy of the CBDT notification in which gratuity limit of 20 lakh is mentioned for IT act,1961
    I have notification of the payment of gratuity act,1972

  12. Rajiv Khanna says:

    Retired from PSB on 31.05.2017 Gratuity received 17 Lacs is it totally exempted I have to file return as of 31.03.2018

  13. Sankar Kumar Das says:

    Dear Sir,
    I retired from a PSU bank w.e.f.01.02.2018 and got my gratuity on superannuation around RS.14 lac in the month of February’18. Tax exemption was for RS.10 lac and tax was paid on the balance amount simultaneously. Upon approval of new gratuity act on 29.03.18 exemption of tax limit on gratuity is increased to Re.20 lac. As I shall file my IT return for full F.Y.2017-18 shortly, should I not claim exemption on full gratuity amount as received in Feb’18.
    Kindly advise.
    Thanks
    S.K.Das

  14. KARTIC CHANDRA DUTTA says:

    sir
    I retired from DAMODAR VALLEY CORPORATION on 31/03/2017, & i got gratuity Rs 200000 with the deduction of tax at source Rs.300000 now my question is is it taxable for fy 2017-18 or not? pl. reply

    Regards
    K C dutta

  15. KOLLURU JAGAN MOHAN says:

    can a person retired in the month of Sep’2017 is eligible for the tax exemption of gratuity during filing of returns of 2017-18?
    Settlement took place in the month of Nov’17 and accordingly tax exemption given Rs.10.00 lakhs. As the returns are to be filed for the whole financial year, therefore, can I claim for the amount paid as income tax?

    • sushil kumar says:

      Sushil Kumar says:
      Can a person retired in the month of May’2017 is eligible for the tax exemption upto 20 lac of gratuity as per notification by govt. on 29th March18, during filing of returns of 2017-18?
      Settlement took place in the month of May’17 and gratuity paid Rs 12.oo ,accordingly tax exemption given Rs.10.00 lakhs. As the returns are to be filed for the whole financial year and income pretains to current FY 2017-18 , therefore, can I claim for the amount paid as income tax on Rs 2.00 lac?

    • K.S.BURANDE says:

      WHETHER THIS AMENDMENT IS APPLICABLE FOR A.Y. 2018-19. BECAUSE THE ASSESSEE RETIRED IN NOV.2017 AND RECEIVED GRATUITY AMOUNT MORE THAN RS.10/- LAKH BUT LESS THAN 20/- LAKH HENCE CLEAR CLARIFICATION IS REQUIRED.

  16. Snehal Sukhadia says:

    In case of the private sector employees not covered under the Payment of Gratuity Act 1972, would the maximum tax free limit be Rs 10 Lakhs or Rs 20 Lakhs?

  17. YB Jain says:

    Would you please suggest on following
    If a person retired on 31.12.2017 from a PSU and he is sanctioned gratuity of Rs. 2000000 but he has not drawn it and the same remain
    Unpaid upto 30.04.2018.
    He is paid the gratuity on 1.05.2018 , would it be taxable , if yes, whether the PSU is liable to deduct TDS on it.

  18. Rajendra Bendale says:

    Dear Sir,
    There was representations from unions to implement the bill wef 01.01.2016, gratuity to calculate with 21 days, number of minimum years service be 3 years.
    Can you please revert whether the notification has been made to bill and what are demands met.

    Thanking you in advance

    Rajendra Bendale

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