On 22nd March, 2018; Rajya Sabha passed the Payment of Gratuity (Amendment) Bill. This important bill addresses significant concerns such as tax free gratuity as well as period of maternity leave. This key move by government is expected bring a surge of benefits for hundreds of people employed in public and private sector both.

Currently, the existing tax free gratuity ceiling is Rs. 10 Lakh. Under the purview of this bill, Government of India will be able to extend it to Rs. 20 Lakh for those employee who are eligible to receive gratuity under Payment of Gratuity Act. In essence, these eligible employees will have no obligation to pay tax on the received gratuity amount upto Rs. 20 Lakh.

Besides, the amendment bill empowers the Government to further raise the limit if and when needed without revising the law. Additionally, the bill contains provisions for updating maternity leave period for female employees under Maternity Benefit (Amendment) Act, 2017.

Here is everything you need to know.

Calculating gratuity

According to Payment of Gratuity Act, to be able to receive gratuity an employee has to serve minimum of 5 years continuously in an organization. The gratuity one receives at the end of the service further depends on tenure and last drawn salary. The gratuity given by the organization to the employee can be calculated at the rate of 15 days of last drawn salary each year including the Basic salary and Dearness Allowance. The formula is,

Gratuity = Last drawn salary (Basic pay plus DA) * No. of completed years in service * 15/26

For the incomplete year of service, 6+ months are considered as full year while less than 6 months are not considered in calculation. For example 10 years and 2 months is taken as 10 years. While for 10 years and 9 months of service, the employee gets gratuity benefit of 11 years.

Increased period of Maternity Leave

With the Maternity Benefit (Amendment) Act, 2017 in backdrop; the bill states to increase the current maternity leave of 12 weeks. The female employees would be deemed to be in continuous service for 26 weeks now. The same period will be used to calculate the applicable gratuity amount.

Gratuity applicability for organizations

If the organization employs minimum 10 employees, it comes under the purview of Payment of Gratuity Act. Once covered, the organization shall always be covered by this act. Then, it is mandated to pay gratuity to the employees who serve them for 5 years and more.

Public and private both sectors are eligible

The act applies equally to all organizations operating in public as well as private sectors. Be it IT, pharma, mining, agriculture, railways, retail, FMCG, or any registered company that employs minimum 10 employees has to pay gratuity to eligible employees.

In pace with 7th pay commission

The Payment of Gratuity (Amendment) Bill goes in pace with 7th pay commission. For central government employees, the implementation of 7th pay commission already provides gratuity ceiling of Rs. 20 Lakh that is double of the previous limit Rs. 10 Lakh.

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