Cabinet clears DA hike of 1%, raises tax-free gratuity cap

The Union government raised the dearness allowance for central government employees and pensioners by 1% on Tuesday, and approved a bill to raise the ceiling of tax-free gratuity from Rs 10 lakh to Rs 20 lakh for private sector employees.

The increase in dearness allowance and dearness relief to 5% from 4% will benefit around 49.26 lakh central government employees and 61.17 lakh pensioners, Union minister Ravi Shankar Prasad said.

Fatter pay cheques could help increase spending in an economy that is seen to be still reeling from the affects of last year’s note ban, though experts said the impact is likely to be mild. The economy growth rate in the last quarter plummeted to 5.7% from the corresponding period a year before.

The hike, which will be given on salaries from July 1, 2017, was part of several decisions taken by the Union cabinet that met for the first time since Prime Minister Narendra Modi’s team was rejigged.

It creates an additional annual burden of Rs 3,068.26 crore per annum on the exchequer, but for this year, it will cost Rs 2,045.50 crore since it is applicable only from July.

“The increase in DA will only mildly support the economy,” said DK Joshi, chief economist at financial analysis firm Crisil.

In a statement, the government said Tuesday’s decisions — particularly the one on the gratuity bill — were made after considering the increase in inflation and wages.

“The 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, which is an important social security legislation to wage earning population in industries, factories and establishments”.

Financial experts welcome the move.

It underscores the present govt’s stated objective of ensuring greater social security

SONU IYER, national leader, people advisory services, EY

“Gratuity adjustment was long due and this will take into account the inflation increase but this will not have any immediate impact on the economy as this is more of a retirement kitty,” Joshi said.

Sonu Iyer, national leader, people advisory services, EY, said the increased gratuity would bring relief to many.

“It is a welcome move in line with increased cost of living and inflation. It also underscores the present government’s stated objective of ensuring greater social security,” Iyer said.

The gratuity ceiling for government employees was raised to Rs 20 lakh earlier as part of the implementation of the 7th Central Pay Commission recommendations, the government’s statement said.