Parliament Passes Payment of Gratuity (Amendment) Bill (Download PDF)

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In move that will benefit millions of workers of private & public sector companies, Rajya Sabha passed Payment of Gratuity (Amendment) Bill, 2017. Features of the New Bill - Enhance ceiling of tax-free gratuity to Rs. 20 lakh from existing Rs. 10 lakh for employees under Payment of Gratuity Act.

Image of Salient features of the payment of gratuity act

Image of Salient Features of the Payment of Gratuity Act

Image of Salient features of the payment of gratuity act

  • Tax liability is nil for any amount upto Rs. 20 lakh as gratuity.
  • Govt. has ability to raise limit of Rs. 20 lakh further to increase cap in gratuity amount as & when need arises w/o having to change law.
  • Amendment bill will allows govt. to fix period of maternity leave for female employees.

How To Calculate Gratuity

  • Amount of gratuity is directly proportional to tenure of service, & to last drawn salary.
  • Gratuity is given at rate of 15 days of last drawn salary for each year of service.
  • Salary that is considered for calculation of gratuity is last drawn salary that includes basic pay & dearness allowance.
  • It is typically calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.
  • According to this formula, time period of over 6 months or more is considered as 1 year. This means if you have completed 5 years & 7 months of service, number of years would be considered as 6 years for calculation of gratuity benefit.

Changes in Gratuity Due to Seventh Pay Commission

  • After implementation of seventh Pay Commission, ceiling of gratuity amount for central govt. employees was doubled to Rs. 20 lakh.

Maternity Leave Benefits and Gratuity

  • Amendment to payment of gratuity law comes in backdrop of Maternity Benefit (Amendment) Act, 2017 enhancing max. maternity leave period to 26 weeks.
  • Maternity leave of 26 weeks will be considered as continuation of service for purpose of calculating amount of gratuity.

When is Gratuity Applicable?

  • Gratuity is benefit received by employee for services rendered to organisation.
  • For companies covered under Gratuity Act, this benefit is paid when employee completes 5 or more years of service w/employer.
  • Gratuity Act applies to establishments employing 10 or more persons.

Who Are Eligible for Gratuity?

  • Payment of Gratuity Act, 1972 allows for payment of gratuity to employees in any establishment, factory, mine, oil field, plantation, port, railways, company, or shop employing 10 or more workers.

- Published/Last Modified on: July 18, 2018

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