No tax on Rs 20 lakh gratuity for private employees

At par with the government employees, even private-sector employees will now be able to withdraw up to Rs 20 lakh in tax-free gratuity.

In a welcome move, the government has recently amended the Payment of Gratuity Act. Private-sector employees will now be able to withdraw up to Rs 20 lakh in tax-free gratuity. Till now, the tax-free limit was Rs 10 lakh for private employees. However, for government employees, the limit was Rs 20 lakh.

This move has brought private-sector employees at par with the central government employees. As per the Act:

i. The 7th Pay Commission allows the central government employees to withdraw tax-free gratuity up to Rs 20 lakh.

ii. All companies and establishments employing 10 or more workers come under the Gratuity Act.

iii. An employee who has completed five years of continuous service in an organisation is eligible for gratuity.

iv. The eligible gratuity amount for an employee is calculated as last-drawn monthly salary multiplied by 15/26 and multiplied by the number of years of service.

v. Salary means basic salary plus dearness allowance and 15/26 is 15 working days’ pay of the 26 days of pay.

vi. The limit of Rs 20 lakh is applicable throughout the lifetime of the employee. So, if an employee receives gratuity from more than one employer, this limit of Rs 20 lakh would be applicable on the cumulative amount of gratuity received from all of them.

vii. This move is expected to be beneficial for most of the private-sector employees since a substantial tax outgo would be reduced. This would increase the amount of disposable income in their hands after retirement.