Gratuity Tax Exemption Limit: The Union Cabinet has made significant adjustments in the gratuity tax exemption limit, increasing it from Rs 20 lakh to Rs 25 lakh. This means that employees receiving gratuity up to Rs 25 lakh will now get tax-free benefits, which will provide considerable relief to the workforce.
What is Gratuity and How Does it Work?
Gratuity is a sum of money provided by an employer to an employee in recognition of their long-term service. Under the Payment of Gratuity Act, 1972, employees who have completed at least 5 years of service in an organization are entitled to gratuity benefits. This amount is generally distributed when an employee leaves his or her job, retires, or in the unfortunate event of death or disability.
Who is Eligible for Gratuity?
According to the Payment of Gratuity Act 1972, employees are eligible to receive gratuity if they have worked for the same employer for at least 5 years. However, exceptions are made in cases of sudden death or disability, where the employee or his nominee is still entitled to gratuity benefits.
Calculation of Gratuity
The gratuity amount is determined based on a specific formula mentioned in the Payment of Gratuity Act. For employees covered under the Act, the formula is as follows:
Last Salary x Length of Service x 15/26
Last salary includes basic salary, dearness allowance and commission on sales (if applicable). The period of service is rounded off to the nearest year, with any service more than 6 months in the last year being considered as a full year.
For employees not covered by the Act, the formula is slightly different:
Last Salary x Period of Service x 15/30
Similar to the formula for covered employees, the last salary includes basic salary, dearness allowance and commission on sales (if applicable). However, the length of service is not added to the final year, only the entire years of service are considered.
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Implications of Revised Gratuity Tax Exemption Limits
Increasing the tax-free limit of gratuity from Rs. 20 lakh to Rs. 25 lakh is a welcome step for employees across sectors. This adjustment not only provides financial relief to individuals but is also in line with the ongoing demands for fair treatment of workers’ rights.
Future Outlook
While the current gratuity system mandates a minimum of 5 years of service, discussions are underway to potentially modify this requirement. The government is exploring the possibility of reducing the service period to 1 year, which could have a positive impact on millions of employees in both private and public sectors. This proposed change in the new wage code is expected to be discussed further.
In short, the recent increase in gratuity tax exemption limit marks a step towards enhancing the financial well-being of employees. As discussions continue on potential reforms, it is important for policymakers to prioritize the interests of the workforce while ensuring a fair and equitable system for gratuity benefits.