Cabinet likely to double the tax-free gratuity limit to INR 20 lakhs

The Union Cabinet is considering a draft amendment bill that would double the maximum limit of tax-free gratuity for the formal sector to INR 20 lakh under the Payment of Gratuity Act.

In addition, the bill seeks to enable the central government to change the maximum limit after taking into account the rise in levels of income by an executive order circumventing the Parliament route for amending the law.

Once the amendment in the Act is in force, all the formal sector workers will be eligible for tax-free gratuity up to INR 20 lakh. In the month of February this year, the central trade unions came to an agreement on the proposal in a tripartite consultation with the Labour Ministry.

Unions ask for removal of conditions

However, the unions are demanding for the removal of conditions such as having at least ten employees in an organization, and minimum service period for the payment of gratuity. Currently, as per the provisions contained in the Payment of Gratuity Act, an employee needs to serve a period of minimum five years to be eligible for the gratuity amount. Furthermore, this Act is applicable only to those organizations having at least 10 employees.

The trade unions had demanded that this amendment with respect to the maximum amount of tax-free gratuity limit must be made effective from 1st January 2016. The union had also asked that the proportion of fifteen days pay for every completed year of service be raised to thirty days pay.

Changes in gratuity tax over the years

The ceiling was last revised from INR 3.5 lakhs to INR 10 lakhs in the year 2010 after the 6th Pay Commission recommendation raised the limit for the central government employees. This move is proposed for bringing parity between the public and private sector employees since on the recommendations of the 7th Pay Commission the ceiling limit of tax-free gratuity was raised for the central government employees from INR 10 lakhs to INR 20 lakhs.

The amendment for the employees of the central government was published on 25th July 2016, and the enhanced ceiling limit was made effective from 1st January 2016.  The unions believe that due to the delay of eight months for the employees covered this Act would not adversely affect the interest of all the concerned employees. 

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