The Cabinet has approved the bill seeking to raise tax-exempt gratuity limit to Rs 20 lakh from the current level of Rs 10 lakhs.
As per current laws under the Payment of Gratuity Act 1972, the gratuity received by government employees is tax exempt, i.e., one is not required to pay any tax on the gratuity amount.
On the other hand, for a non-government employee, the gratuity received in his entire working life is tax-free up to a maximum limit of Rs 10 lakh.
The Act is applicable to those establishments where 10 or more employees work on any single day in the preceding 12 months of the year.
The Act also states that once an establishment is covered under its ambit then it will always be covered, even if the number of employees falls below 10.
As per the Act, an employee is eligible to receive gratuity only if he has completed at least five years of continuous service with an organisation, without any interruption. However, the interruption may be allowed if it is on account of sickness, accident, layoff, strike or lockout, which is not the employee’s fault.
Payment of gratuity
As said earlier, gratuity is generally paid to the employee on his retirement. However, there are other instances, other than retirement, when it has been paid to the employee, such as:
a) On his superannuation.
b) If he has tendered his resignation after serving the organisation for more than five years.
c) On his death, even if the employee has not covered the mandatory five-year working period.
d) If he becomes disabled due to accident or disease even when the working period of five year is not completed.
Calculation of tax exempted gratuity
1. For the employees covered under the Act, the least of the following is exempted from tax:
a) Rs 10 lakhs.
b) Actual gratuity received.
c) 15 days salary based on the last drawn salary for each completed year of service or part thereof in excess of six months.
*Salary includes basic salary received by the employee and the dearness allowance and commission received if any.