The Government of India in 2016 increased the ceiling on gratuity payable to Central government employees from Rs 10 lakh to Rs. 20 lakh, on recommendations of the Seventh Pay Commission. Recently, the Central government approved a bill which proposed similar amendment to the Payment of Gratuity Act, 1972, applicable to other employees. The new provisions will be applicable either from last quarter of CY2017 or from first quarter of CY2018. The increased limit would be applicable to gratuity amount already accrued in the account of the employee till date and to the amount that will accrue in future.
The increased gratuity limit would benefit all employees who are part of their employer’s gratuity scheme. If an employee has already received Rs. 10 lakh from previous employers, he/she can accrue Rs. 10 lakh more from current and future employers. If the gratuity amount of an employee has already reached Rs. 10 lakh with the current employer, the employee can continue to accrue gratuity benefits for an additional Rs. 10 lakh. The gratuity amount is tax-free, so now the tax free gratuity amount has now doubled from Rs. 10 lakh to Rs. 20 lakh.
If an employee has not received any gratuity payment from previous employments, he/she will be entitled to receive the full gratuity amount of Rs. 20 lakh tax-free. However, if an employee has received, say, Rs. 3 lakh as tax-free gratuity amount from previous employer(s), and his/her gratuity amount with the current employer stands at Rs. 2 lakh, he/she will be entitled to accrue Rs. 15 lakh as additional tax-free gratuity amount and another Rs. 3 lakh which will be subject to marginal tax rate.
As per the Payment of Gratuity Act 1972, an employer with 10 or more than employees has to provide gratuity benefit to the employees at the time of leaving employment, subject to a minimum service period of 5 years.