Centre seeks to double tax-free gratuity limit to Rs 20 lakh. Here's what gratuity means and how it is calculated

The government is all set to introduce an amendment bill to increase the limit of tax-free gratuity for formal sector employees to Rs 20 lakh. The Union Cabinet agreed to table the Payment of Gratuity (Amendment) Bill, 2017 in Parliament in its meeting today.
 
"The Union Cabinet chaired by Prime Minister Narendra Modi has given its approval to introduction of the Payment of Gratuity (Amendment) Bill, 2017, in Parliament," a government statement said.
 
The Union 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, on account of inflation and increase in salaries of employees working in the private sector. The key motive behind this Act is to ensure social security of salaried employees after retirement, irrespective of the fact whether it is because of rules of superannuation, or physical disablement or impairment of vital parts of the body.
 
This amendment bill will benefit employees working in the private sector, as well as staff members of public undertakings and autonomous organisations under the government who are not covered under Central Civil Services (Pension) Rules. As of now according to the Act, they are entitled to tax-free gratuity up to Rs 10 lakh. The amendment will bring their gratuity at par with central government employees, which is Rs 20 lakh.
 
The limit of tax-free gratuity for central government employees under Central Civil Services (Pension) Rules, 1972 was increased to Rs 20 lakh from Rs 10 lakh last year on recommendations of the 7th Pay Commission. The changes were notified on July 25, 2016 and were put into effect from January 01, 2016. Along with it, the government began the process to amend the Payment of Gratuity Act, 1972.
 
Therefore, the Gratuity Act serves as a key social security legislation to wage earners in industries, factories and establishments.
 
What and how of Gratuity

• Gratuity is a sum of money an employee receives from his or her employee in exchange of services rendered to the organisation. Gratuity, however, is paid only to employees who have worked for five years or more in a company.
• The Payment of Gratuity Act, 1972 applies to organisations with a workforce of ten or more employees.
• Gratuity is paid to employees under private sector, public undertakings and autonomous institutions under government but not covered under Central Civil Services (Pension) Rules, 1972. The objective is to ensure social security of salaried employees after retirement, irrespective of the reason for retiring.
• The formula presently used to calculate gratuity incorporates the number of years the employee has worked with the establishment and the last basic salary he or she has withdrawn along with the DA. The formula is (number of years of service)x(last basic pay + dearness allowance)x15/26.
• The employer can choose to pay more than the amount that is calculated with the above formula as gratuity. Employers may even pay gratuity out of their own pockets or take a group gratuity plan with an insurance provider.