Bill to double gratuity ceiling for private employees approved; are you eligible?

Union Cabinet on Tuesday which was chaired by Prime Minister Narendra Modi approved the introduction of Payment of Gratuity (Amendment) Bill, 2017 in the Parliament. 

With the implementation of 7th Pay Commission, the gratuity ceiling for government employees was raised from Rs 10 lakh to Rs 20 lakh.

This Amendment Bill seeks to double tax -free gratuity for private sector employees to Rs 20 lakh as against the current limit of Rs 10 lakh. This will bring private sector employees as well as the central government employees at par. 

Amendment will increase the maximum limit of gratuity of employees, in the private sector and in Public Sector Undertakings/ Autonomous Organisation under government who are not covered under CCS (Pension) Rules, making the limit at par with that for Central Government employees.

As per the Cabinet, "Considering the inflation and wage increase even in case of employees engaged in private sector, the Government is of the view that the entitlement of gratuity should be revised for employees who are covered under the Payment of Gratuity Act, 1972."

What is Payment of Gratuity Act, 1972?

Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. However, gratuity is paid only to employees who complete five or more years with the company.

Gratuity is a benefit payable under the Payment of Gratuity Act passed in the year 1972.

As per the Ministry of Labour & Employement, Payment of Gratuity Act is an act to provide for a Scheme for the payment of gratuity to employees engaged in factories, mines, oil fields, plantations, ports, railway companies, shops or other establishments and for matters connect therewith or incidental thereto. 

The gratuity amount unlike provident fund is totally paid by the employer without any contribution from the employee.

Are you eligible?

Following are the few instances when you will be eligible to receive gratuity.

1. An employee should be eligible for superannuation
2. An employee retires
3. An employee resigns after working for 5 years with a single employer
4. An employee passes away or suffers disability due to illness or accident

How to calculate?

According BankBazaar, the amount is dependent upon the number of years served in the company and the last drawn salary.

If, N = number of years of service in a company

B = last drawn basic salary plus DA

then, Gratuity = N*B*15/26

For example, if Amit is an engineer who has worked with SF Company for 20 years of service and had Rs.25,000 as his last drawn basic plus DA amount, then,

Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54

However, an employer can choose to pay more gratuity to an employee (since it is a form of tip as mentioned in the beginning) but then the amount as restricted by the Gratuity Act cannot exceed more than Rs.10 lakh. Though, this ceiling has been doubled to Rs 20 lakh now.