Gratuity may be a benefit given by the employer to employees. A recently approved amendment by the Centre has increased the limit of gratuity. Now it’s tax-exempt up to Rs 20 lakh from the previous ceiling of Rs 10 lakh, which comes from Section 10(10) of the Tax Act. The CBDT Notification no. S.O. 1213(E), dated 8 March 2019, clarified that the exemption limit of Rs 20 lakh would be applicable to employees within the event of retirement or death or resignation, or disablement on or after 29 March 2018.

Let us understand the impact of this amendment compared with the previous provisions.

Table of contents

Understanding the fundamentals of Gratuity

Workers do not come Under the Payment of Gratuity Act

Employees or workers Not Covered Under the Payment of Gratuity Act

Government Employees

Impact of the Amendment

Understanding the fundamentals of Gratuity

Gratuity could be a monetary benefit given by the employer, but not paid as a part of the regular monthly salary. The provisions of gratuity are governed by the Payment of Gratuity Act, 1972, and it’s given on the occurrence of any of the subsequent events.

On superannuation (means an employee who attains the age of retirement is claimed to be in superannuation)

On Retirement Or Resignation

On death or disablement because of accident or disease (the deadline of 5 years shall not apply within the case of death or disablement of the worker), it’s mandatory for the employee to own completed a minimum of 5 years in commission to be able to receive gratuity. it’s not available for interns or temporary employees.

Employees Covered Under the Payment of Gratuity Act

Every individual – working in a very factory, mine, oil field, port, railways, plantation, shops & establishments, or institution having 10 or more employees on any day within the preceding 12 months – is entitled to gratuity.

Once the Act becomes applicable to an employer, whether or not the amount of employees goes below 10, gratuity remains applicable.

Calculation of the quantity of gratuity exempted from tax

The least of the subsequent is exempt from tax:

Last salary (basic + DA)* number of years of employment* 15/26;

Rs. Twenty lakhs (which has been strolled from Rs. Ten Lakh as per the amendment);

Gratuity actually received

Let us understand this through an illustration: The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). he’s entitled to receive a gratuity of Rs. 11 Lakhs. He has been working for the last 19 years and seven months.

Sr. No. Particulars Previously As Amended

1 Last drawn salary (Basic + DA) 1 lakh 1 lakh

Number of years of employment 20 (will be rounded off) 20 (will be rounded off)

Gratuity 1,00,000*20*15/26 = 11,53,846 1,00,000*20*15/26 = 11,53,846

Two Maximum privileges allowed ten lakhs to 20 lakhs (as amended)

3 Gratuity actually received 11 lakh 11 lakh

Percentage of exemption ten lakh 11 lakh

Taxable gratuity 1 lakh.

Points to note:

15 days salary supported the salary last drawn for each completed year of service or part thereof i.e. 15/26.

A number of years in commission is rounded off to the closest full year.

Employees Not Covered Under the Payment of Gratuity Act

There is no law that restricts an employer from paying gratuity to his employees, whether or not the organization isn’t covered under the Payment of Gratuity Act. the quantity of gratuity payable to the worker is often calculated supported by half month’s salary for every completed year.

Tax-Free Gratuity Limit

Calculation of the amount of gratuity exempted from tax

The least of the subsequent are exempt from tax:

Last 10 month’s average salary (basic + DA)* number of years of employment* 1/2;

Rs. 10 lakhs (the hike to Rs 20 lakhs isn’t applicable for workers not covered under the Payment of Gratuity Act)

Gratuity actually received

Gratuity exemption is as follows;

Raghav has been employed for 25 years and a couple of months. the common salary for the last 10 months is Rs. 90,000. the particular gratuity received by him is Rs. 11 Lakhs.

Sr. No. Particulars Amount (Rs.)

1 Average of last 10 month’s salary 90,000

No. of years of employment twenty-five (will be rounded off)

Gratuity 90,000*25*1/2 = 11,25,000

2 Maximum exemption allowed 10 lakhs

3 Gratuity actually received 11 Lakhs

Amount of exemption (least of the three) 10 Lakhs

Taxable Gratuity 1 Lakh

Points to note:

An average salary for the previous 10 months is taken into account

The number of years in commission is rounded off to the closest full year

Government Employees

Gratuity paid by the govt to government employees is fully exempt from tax.

Impact of the Amendment

The impact of the amendment is clear from the instance. A hike within the ceiling limit of maximum exemption helps reduce the taxable gratuity amount. This amendment goes to profit those earning higher salaries in the short run. However, if you’ve got a protracted-time left before your retirement, this amendment will benefit most employees.