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Friday, February 24, 2017

Tax-free gratuity ceiling for pvt sector employees to be doubled to Rs 20 lakh

Private-sector employees will soon be able to withdraw up to Rs 20 lakh in tax-free gratuity after the Centre decided to amend a law and double the amount, bringing them at par with central government staff. 

Currently, private sector employees can get tax exemption up to Rs 10 lakh in gratuity after five years of continuous employment. 

A tripartite meeting between the labour ministry, trade unions and employee bodies decided on Thursday that a bill to amend the Payment of Gratuities Act will be brought in the second half of the Budget session of Parliament. 

The Left-affiliated labour unions also demanded that employees get gratuity after one year of service, instead of the current cap of five years.

The move comes after the seventh pay commission’s recommendation allowing central government employees to earn tax-exempted gratuity up to Rs 20 lakh. 

At the meeting, labour minister also told the unions that the bill to amend the gratuity level may also have a mechanism to ensure automatic revision of gratuity ceiling as and when the pay commission suggests similar measures for central government employees. 

“It is a good move to bring the private sector at par with central government employees. This move will also partly offset the impact of inflation,” said Rahul Garg, leader of direct taxes at PwC India.

The trade unions also demanded that the new gratuity ceiling for tax benefits be applicable retrospectively from January 1, 2016. Sources however, told HT that the government was unlikely to enforce a retrospective amendment to the tax laws. 

The provision of tax exemption on gratuity falls under section 10 of the Income Tax Act and was last amended in 2010. For a change in gratuity provisions, both the Payment of Gratuity act and the Income Tax Act would have to be amended. 

Gratuity is calculated on the monthly basic salary added with dearness allowance. It is withdrawn upon termination of employment or retirement.

The amount paid is usually the salary multiplied with the numbers of years of service and 15/26 (salary*years of service*15/26) – the gratuity is calculated on 15 out of 26 working days.

For example, a person with 10 years experience would need a basic salary + dearness allowance of more than Rs 3.5 lakh a month to withdraw a gratuity of Rs 20 lakh at the end of her service.

This is why experts believe the new move won’t hit the government’s tax collections given that a gratuity earning of Rs 20 lakh would be limited to high-salaried individuals. In India, 24 lakh people declare an income of above Rs 10 lakh and only 1.72 lakh people earn over Rs 50 lakh. 

In 1997, the tax relief on gratuity was increased from Rs 2.5 lakh to Rs 3.5 lakhs. This was further increased to Rs 10 lakh in 2010.
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