Ball set rolling for higher tax-free gratuity

The Centre has cleared an amendment whose logical conclusion is expected to exempt private sector employees’ gratuity up to Rs 10 lakh from income tax.

At present, gratuity below Rs 3.5 lakh is spared the tax. Companies can pay a higher amount but income tax will have to be paid on the sum above Rs 3.5 lakh.

The Union cabinet today cleared a proposal to raise the ceiling for payment of gratuity to private sector employees from Rs 3.5 lakh to Rs 10 lakh.

As a first step, the Payment of Gratuity Act will be amended which will officially permit companies to pay more, although many are already doing so.

The next step will be more crucial: amending the income tax act so that the exemption limit could be raised from Rs 3.5 lakh to Rs 10 lakh.

“The cabinet has approved the bill seeking to amend the Payment of Gratuity Act which will be introduced in the current session of Parliament,” Union labour minister Mallikarjun Kharge said.

“The proposed amendment will increase the maximum gratuity from Rs 3.5 lakh to Rs 10 lakh. The provision of the income tax act will be suitably amended for the benefit to continue,” he added.

The minister did not say when the income tax act would be amended. If the finance minister is willing, it can be done in this session itself.

The current exemption limit of Rs 3.5 lakh on gratuity payment means that an employee putting in 35 years of service (joining at the age of 25 and retiring at 60) can avoid paying tax if his basic salary is Rs 20,000 a month. If the income tax act is amended, the basic salary on which gratuity payment will be exempt from tax can go up to Rs 57,142 a month.

Those earning still higher can get more gratuity but will have to pay tax on the excess amount.

Gratuity is a statutory benefit paid by employers to employees who have completed not less than five years of continuous service. The number of years for eligibility varies in some organisations. All establishments employing 10 or more persons have to pay gratuity.

At the time of exit — either because of resignation or retirement or death — an employee or beneficiary will be paid 15 days’ salary, taking the last drawn salary as the basis, for every completed year of service.

The Sixth Pay Commission had recommended that the limit be raised to Rs 10 lakh for central government employees. The decision today is an attempt to bring parity between government and private employees.

In the last Parliament session, the Centre had amended the gratuity act to clarify the definition of an employee. Anybody who is earning a wage is classified as an employee. Teachers were also brought within the ambit of the act.