Union Cabinet chaired by Prime Minister Narendra Modi approved the new ‘Payment of Gratuity (Amendment) Bill, 2018’ on March 27, 2018. According to the Bill, tax-free gratuity for private sector employees is likely to reach Rs. 20 lakh compared to the current limit of Rs. 10 lakh, a noteworthy move that will bring private sector and government employees at an equal level. The relief for private sector employees came after the implementation of the 7th Pay Commission, wherein the tax-free gratuity for government employees was doubled to Rs. 20 lakh.
As per the Payment of Gratuity Act, 1972, companies with more than 10 employees provide gratuity benefits to their employees. The purpose is to provide social security to employees post retirement by giving them tax exemptions on their gratuity payout.
Under the Act, an employee who works with the same company for more than 5 years is entitled to gratuity, post retirement. The company needs to pay an amount equal to 15 days of last drawn ‘basic salary plus dearness allowance’ for each of those 5 years. In case the service period is more than 6 months in the final year of service, the employee is entitled to a gratuity for the complete year. For instance, if an employee has worked for 9 years and 6 months, he/she will be entitled to receive a gratuity payout for 10 years.