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Cabinet clears bill to double tax-free gratuity to Rs 20 lakh

Subhayan Chakraborty / New Delhi 13 Sep 17 | 03:59 AM

In a move that will bring a cheer to private and public sector employees in the country, the government has decided to double the upper limit of tax-free gratuity payable to an employee to Rs 20 lakh.

The Cabinet on Tuesday approved the introduction of the Payment of Gratuity (Amendment) Bill, 2017, in Parliament.

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It also increased dearness allowance and dearness relief by one percentage point to 5 per cent, benefiting 5 million employees and 6.1 million pensioners.

Apart from private sector employees, the amendment to the Gratuity Act, 1972, is also expected to increase the limit of gratuity of employees in public sector undertakings and autonomous government organisations not covered under CCS (Pension) Rules, and bring it at par with central government employees.

Under the Gratuity Act, payment is mandatory and gratuity will be payable to an employee on termination of employment after he or she has rendered continuous service for not less than five years. It may be paid earlier in cases of death or disablement.

Before the implementation of the Seventh Central Pay Commission recommendations, the ceiling under CCS (Pension) Rules, 1972, was Rs 10 lakh. However, after its rollout, the ceiling has been extended to Rs 20 lakh for government servants, effective January 1, 2016.

The government has decided to revise the entitlement of gratuity after considering inflation and wage increases in the private sector. However, legal and tax experts have suggested that firms may be hit by the decision to a significant degree.

“The central government’s move is a welcome step from an employee’s perspective. However, industry would be impacted if this proposal becomes law, considering the higher amount of gratuity now payable to an eligible employee pursuant to his exit from employment or retirement, as the case may be," Anshul Prakash, Partner at law firm Khaitan & Co, said.

Earlier, employers could limit their liability to the statutory cap of Rs 10 lakh even if the calculation of gratuity for an eligible employee resulted in a higher figure, he added.

On the other hand, an upgrade in dearness allowance and dearness relief to government employees, to be calculated from July 1, is expected to benefit about 4.926 million central government employees and 6.117 million pensioners, the government said in a statement.

“Release of additional instalment of DA is an increase of 1 per cent over the existing rate of 4 per cent of the basic pay/pension, to compensate for price rise," an official statement read.

The combined impact on the exchequer on account of both DA and DR would be Rs 3,068.26 crore per annum and Rs 2,045.50 crore in the financial year 2017-18 (for eight months from July 2017 to February 2018), it added.

Other decisions


* Okays Rs 3,000-crore project for oil, gas reserves appraisal


* Nod to Rs 10,881-crore dairy processing and infra fund


* Approves signing of an agreement with Morocco on health care and another with Armenia on cooperation in disaster management

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