What does increase in the taxfree gratuity withdrawal mean for you?
The gratuity withdrawal limit has been raised to ₹20 lakh from the current ceiling of ₹10 lakh. The tax exemption limit on gratuity is also set to increase to ₹20 lakh. Mint cited a labour ministry spokesperson as saying on February 23, 2016 that all stakeholders — states, the Centre, unions and industry representatives — agreed to this. Here’s how the move will affect most employees.
WHAT IS IT?
Gratuity is part of an employee’s salary, but is not paid every month. It is paid at the time of resignation or retirement, but only for employees who have worked for at least five years. In case of death of an employee, the amount is paid to the employee’s family irrespective of the employment period. Under the Payment of Gratuity Act, 1972, any establishment (factory, mine, oilfield, plantation, port and railway company, or shop) having more than 10 employees at any point of time in a year is required to pay gratuity to its employees.
TAX LIABILITY
Under the Income-tax Act, gratuity is taxed under income from salaries. Part of the gratuity received can be exempt from tax under section 10(10) of the Income Tax Act 1961, depending on various factors. But gratuity received by a government employee (central, state or local), on death, or retirement is fully exempt from tax.
Under the current regime, least of the following received by the employee is exempt from tax — ₹10 lakh or the actual gratuity received, or 15 days salary for each completed year of service (here 15 days salary is calculated by dividing one month basic salary and dearness allowance by 26, and then multiplied by 15) In cases where the actual gratuity exceeds ₹10 lakh, only ₹10 lakh can be paid as gratuity and this will be exempt from tax based on the above rule.
The remaining amount can be paid as a so-called ex-gratia payment or performance bonus and is taxable.
The increase in the limit means employees can receive a higher gratuity, with more of it being exempt from tax.
Of course, all this is only in companies that come under the Payment of Gratuity Act.
In the case of those that don’t, the tax-free gratuity is the lowest of ₹10 lakh, the actual gratuity received, or half month’s salary for each completed year of service. Here, salary is taken as average salary of the 10 months immediately before the month in which the person retires. This is also likely to change once the law is amended