The gratuity received by private sector workers will soon be made tax free up to Rs.20 lakh. Till now, the tax free limit was Rs.10 lakh, though the limit for government workers was higher at Rs.20 lakh. A tripartite meeting between the Labour Ministry, trade unions and employee bodies decided last week that a bill to amend the Gratuities Act will be brought in the second half of the Budget session of Parliament. The change will bring private sector employees on par with government employees.
All companies and establishments deploying 10 or more workers come under the Gratuity Act. Gratuity is calculated as: Last drawn salary × 15/26 × number of years of service. Salary means basic pay plus dearness allowance; 15/26 means 15 working days’ pay of the 26 days of pay. At present, an employee with at least five years of continuous service is eligible to get gratuity, which forms part of the overall salary package, but is not paid monthly. In 1997, the tax relief on gratuity was increased from Rs.2.5 lakh to Rs.3.5 lakh. This was further increased to Rs.10 lakh in 2010.
Currently, an employee with at least five years of continuous service is eligible to get gratuity, which forms part of the overall salary package of an employee, but not paid monthly.