Last updated: August 29th, 2024 4:18 PM

Tax-Free Gratuity Limit

Gratuity refers to a sum of money paid to an employee at the cessation of employment. The Payment of Gratuity, Act, 1972, was brought into force to facilitate the gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops and other establishments. Gratuity laws are applicable to employees who have completed a minimum term of five years of continuous service in an establishment with ten or more employees. The Government of India increased the tax-free gratuity limit from Rs.10 lakhs to Rs.20 lakhs. The increase in the tax-free limit was introduced through the Payment of Gratuity Bill, 2017. In this article, we discuss the concept of taxability of gratuity payment.

Who can Claim Gratuity?

The Payment of Gratuity, Act, 1972, has specified the following persons to be the rightful recipients of gratuity:

• Employees who are eligible for superannuation
• Retired employees
• Employees, who have completed a minimum term of five years of continuous service in an establishment, which houses ten or more persons
• An employee who becomes deceased or disabled due to illness or accident

The amount of gratuity is determined by two important aspects:

• The number of years served in an organization
• The basic salary received most recently

Payment of Gratuity Bill, 2017

The Government has increased the tax-free limit of gratuity received by an employee to Rs.20 lakhs. The increase in the tax-free limit for gratuity will help higher salary employees. Employees in both Government and Private sector will benefit from the tax-free gratuity limit increase. In a span of an employee’s career, the tax-free gratuity amount that is claimable as an exemption under the Income Tax Act cannot exceed Rs.20 lakhs in total, from all the employers considered collectively. Employers can pay more than the stipulated Gratuity amount and any amount paid as a gratuity by the employer over Rs.20 lakhs shall be taxable.

Maternity Leave

In addition to the increase in tax-free gratuity amount, the Payment of Gratuity Bill, 2017 has also provided powers to the Central Government for determining maternity leave. Under the new provisions, expectant mothers can enjoy a maternity leave period of 26 weeks and the period of maternity leave would be deemed to be in continuous service. A copy of the Payment of Gratuity Bill, 2017 is reproduced below for reference: