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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Qualified CA with around 35 years of experience in - Financial Accounting, Core Finance, Taxation, VAT implementation, GST implementation, ERP (SAP) implementation, EPCG; Duty Draw Back, Insurance Management, Logistics Management, etc. Author of books on VAT, Central Excise, Customs & Direct Tax View Full Profile

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

  1. 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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