Tax free gratuity doubled to Rs 20 lakh, but what's in it for you

The government has notified doubling of the limit of tax-free gratuity to Rs 20 lakh in private sector, bringing in cheer. The notification follows changes in the Payment of Gratuity Act which had empowered the government to fix the ceiling of the retirement benefit through an executive order. DNA Money spoke to personal finance experts to understand what’s in it for you.

Grand Gratuity

So far, formal sector workers with five or more years of service are eligible for Rs 10 lakh tax-free gratuity after leaving job or at time of superannuation. Now, that money has doubled to Rs 20 lakh. Gratuity exemption under the Income Tax Act is linked to the limits specified in section 4 of Payment of Gratuity Act, 1972. Earlier this section specified a fixed sum of Rs 10 lakh, which now with the amendment to the Payment of Gratuity Act, the government is authorised to change the limit by way of a notification. “Hence with this amendment, the government will easily be able to change the limits for the payment of gratuity, whenever needed considering the need. At the same time it’s a big relief for the private sector employees as the gratuity received by them up to Rs 20 lakh will now qualify for tax exemption under the Income Tax Act,” says Chetan Chandak, head of Tax Research, H&R Block India.

At par with govt employees

The recent amendment passed in both houses of the parliament brings the private sector employees on par with the central government employees who received this benefit more than a year earlier, according to Subramanyam Sreenivasaiah, CEO of AscentHR.
The increase from Rs 10 lakh to Rs 20 lakh as tax-free gratuity is more relevant to the government or PSU where the long service is a common phenomenon.

However, not everybody sees all good in the new gratuity norms. “It is a mere eyewash in the private sector where the length of service tenure is many a time less than the eligible period of five continuous years of service. In addition considering the current calculation of 15 days of wages of basic + DA (dearance allowance), a person to receive Rs 20 lakh gratuity with the full service period at say 34 years, would need to be drawing above Rs 1,00,000 as basic wages (basic + DA) as his last drawn salary which is pretty rare given basic constitutes about 40% of a gross salary going upwards of Rs 2.5 lakh a month,” notes Subramanyam.

Alternatively, the government could have reviewed the applicability of salary as gross salary instead of basic wages to extend a better benefit to employees with longer service tenure. The reservation of a right to amend the period from time to time without amending the act is the only silver line, he feels.

Incentives rise to stay put

While the amendment will bring parity in the taxation of gratuity between government and non-government employees, its benefits will be limited to a very small part of the salaried class. However, incentives to stay with your current employer have risen. “First, only those completing five years of continuous employment in a single organization qualify for gratuity. Second, as the gratuity amount is usually calculated on the basis of the ‘basic + DA’ component of the last drawn salary and the number of years of service, one has to either have high salary or should have spent a significant number of years in an organization to earn a gratuity of over Rs 10 lakh,” remarked Naveen Kukreja, CEO & co-founder, Paisabazaar.com.

For example, after five years of service, someone whose ‘basic + Dearness Allowance’ component of salary is over Rs 4 lakh per month, will get a DA of more than Rs 10 lakh. Similarly, an employee who has a ‘basic + DA’ component of Rs 60,000 will need to have served 30 years in the organisation to earn a gratuity of more than Rs 10 lakh.

The increase exemption may benefit those salaried employees who have just started their careers and stay in organisations for more than five years consistently through their professional lives, added Kukreja.

By Kumar Shankar Roy

(Source: DNA Money)