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Gratuity Upper Limit Set to be 20 Lakh: How will it Impact Private Sector Employees

The 20 Lakhs tax-free Gratuity amendment for private and public sector employees comes in the wake of a similar amendment made for the Central Government employees last year on July 25th, 2016 on the recommendation of 7th Pay Commission.

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Updated:September 13, 2017, 7:38 PM IST
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Gratuity Upper Limit Set to be 20 Lakh:  How will it Impact Private Sector Employees
PM Narendra Modi would perform a brief puja at the dam site before the inauguration. (Image: Getty Images)
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Gratuity is an End of Service benefit and the Union Cabinet led by Prime Minister Narendra Modi approved to introduce the Payment of Gratuity (Amendment) Bill 2017 in Parliament which aims at doubling the Gratuity Ceiling for private sector employees and public undertakings (including autonomous bodies) from the current 10 Lakhs to 20 Lakhs tax free Gratuity, bringing it at par with the Central Government employees.

The 20 Lakhs tax-free Gratuity amendment for private and public sector employees comes in the wake of a similar amendment made for the Central Government employees last year on July 25th, 2016 on the recommendation of 7th Pay Commission. The upper limit of ₹20 Lakhs tax-free Gratuity was made applicable to Central Government Employees from January 1st, 2016.

How Will It Impact the Common Man?

Private sector employees till date used to receive up to ₹10 Lakhs of Gratuity despite being some eligible for a larger end of service payout. The statutory cap of ₹10 Lakhs limited Gratuity disbursement to employees with higher salaries who had completed more than 5 years of service in the same organization. ₹20 Lakhs Gratuity ceiling will give more justice to the loyalty and dedication an employee nurtures towards his/her organization.

"Considering the inflation and wage increase even in case of employees engaged in the 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," read an official statement from the Central Government.

Who is Eligible for Gratuity?

Gratuity is an End of Service or Retirement benefit given to employees of the companies who are covered under the Gratuity Act. Gratuity Act applies to companies with 10 or more salaried/waged employees. An employee becomes eligible for Gratuity on the completion of 5 years.

Gratuity is payable at the time of retirement/resignation /superannuation only if the employee has rendered atleast 5 Years of continued service to the organization. However, in case of death or disablement of the employee before 5 Years, Gratuity is still payable to his/her family members or legal heir.

How to Calculate Gratuity?

The formula to Calculate Gratuity is as follows:

Gratuity = [ (Basic Pay + Dearness Allowance) x 15 days x Total Number of Years of Service ] / 26

While calculating Gratuity, the Basic Pay and Dearness Allowance (DA) are picked from the employee’s last drawn salary.

Also, Total Number of Years of Service are calculated on the basis of full years of completion rounded off to the nearest. For example, if an employee has completed 5 years 7 months, number of years will be considered as 6 years. On the other side, if an employee has completed 5 years 5 months, it will be considered as 5 years only.

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| Edited by: Puja Menon
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