Tax-Free Gratuity Limit
Tax-Free Gratuity Limit
Gratuity is a sum of money paid to an employee at the cessation of his/her employment. The Payment of Gratuity, Act, 1972, was brought into force to facilitate the gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. Gratuity laws are applicable to employees, who have completed a minimum term of five years of continuous service in an establishment with 10 or more employees.
The Government has recently increased the tax-free gratuity limit from Rs.10 lakhs to Rs.20 lakhs. The increase in tax-free limit was introduced through the Payment of Gratuity Bill, 2017. In this article, we look at gratuity payment in detail.
Who can Claim Gratuity?
The Payment of Gratuity, Act, 1972, has specified the following persons to be the rightful recipients of gratuity:
- Employees eligible for superannuation.
- Retired employees.
- Employees, who have completed a minimum term of five years of continuous service in an establishment, which houses ten or more persons.
- An employee who becomes deceased or disabled due to illness or accident.
The amount of gratuity is determined by two important aspects:
- The number of years served in an organization.
- The basic salary received most recently.
Payment of Gratuity Bill, 2017
The Government has increased the tax-free limit of gratuity received by an employee to Rs.20 lakhs. The increase in tax-free limit for gratuity will help higher salary employees. Employees in both Government and Private sector will benefit from the tax-free gratuity limit increase.
In a span of an employee’s career, the tax-exempt gratuity amount that is claimable cannot exceed Rs.20 lakhs in total, from all the employer’s put-together. Employers can pay more than the stipulated Gratuity amount and any amout paid as gratuity by the employer over Rs.20 lakhs would be taxable.
In addition to the increase in tax-free gratuity amount, the Payment of Gratuity Bill, 2017 has also provided powers to the Central Government for fixing maternity leave. Under the new provisions, expectant mothers can enjoy a maternity leave period of 26 weeks and the period of maternity leave would be deemed to be in continuous service.
A copy of the Payment of Gratuity Bill, 2017 is reproduced below for reference:Payment of Gratuity Bill, 2017
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