Gratuity limit enhanced to Rs 20 lakhs!

Gratuity is a monetary benefit given by the employer to his employee on occurence of any of the following events:

• On superannuation (means an employee who attains the age of retirement is said to be in superannuation);
• On retirement or resignation;
• On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

It is mandatory for the employee to have completed minimum five years in service to be able receive gratuity.

 The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons.

An organisation will come under the purview of the Act if it has 10 or more employees on any single day in the preceding 12 months. Once an organisation comes under the Act, it will always remain covered even if the number of employees falls below 10.

Least of the following is exempt from income tax:

• Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.

According to this formula, the time period of over six months or more is considered as one year. This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit. On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered as five years.

• Rs. 20,00,000 (limit increased)

Government vide notification S.O. 1420 (E) dated 29.03.2018 increased the limit of amount of gratuity payable to an employee under sub-section (3) of section 4 of the Payment of Gratuity Act, 1972 (39 of 1972) from the existing limit of Rs. 10 Lakh to Rs. 20 Lakhs.

• Gratuity Actually received

There is no law that restricts an employer from paying gratuity to his employees even if the organisation is not covered under the Payment of Gratuity Act. The amount of gratuity payable to the employee can be calculated based on half month’s salary for each completed year.

The least of the following is exempt from income tax:

• Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 1/2.
• Rs. 20,00,000 (limit increased)

Government vide notification S.O. 1420 (E) dated 29.03.2018 increased the limit of amount of gratuity payable to an employee under sub-section (3) of section 4 of the Payment of Gratuity Act, 1972 (39 of 1972) from the existing limit of Rs. 10 Lakh to Rs. 20 Lakhs.

• Gratuity Actually received

Note:

Gratuity received by a government employee is fully exempt from tax.

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