Good News! Your Tax-Free Gratuity Limit Increased And Much More!   Mar 26, 2018


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Rajya Sabha recently cleared the Payment of Gratuity (Amendment) Bill 2018 without any resistance (and discussion), merely by the vote of voice. Once the president gives his nod, which is now only a formality, the fortunes of those working in India’s formal economy will change forever.

Why was the passage of this Bill so crucial?

The limit of tax-free gratuity to double

In recent times, the government hiked the limit on tax-free gratuity to Rs 20 lakh for the Central Government employees as suggested by the 7th Pay Commission report. But, this had put their private sector counterparts at a disadvantage.

The passage of the Payment of Gratuity (Amendment) Bill 2018 was crucial as it will now replace the Payment of Gratuity Act, 1972, thereby creating a level-playing field for the private sector employees.

How will the tax-free gratuity be calculated now?

  • Rs 20 lakh; or
  • Actual gratuity received; or
  • Gratuity an employee is entitled to receive—based on the formula— as per the provisions of Act.

The formula is (15/26) x last drawn salary x number of completed years.

Note: Salary means basic plus dearness allowance

Furthermore, since the “maximum amount” isn’t clearly defined in the new law, the government will have the flexibility to increase the limits at a regular frequency to factor in the inflation and wage increases.

In the future, it will not have to amend the Act, but it can introduce changes by notification in the Official Gazette. This is a significant and a positive change.

The new law brings cheers to the pregnant women

The passage of this Bill has cleared the way for the government to amend the provisions on maternity leave for the calculation of “continuous service” to be considered for the gratuity payment towards a female employee.

For now, the government wants to enhance the paid maternity benefits to 26 weeks from the existing 12 weeks through the Maternity Benefit (Amendment) Act, 2017.

In other words, absence on account of maternity leave upto 26 weeks would be ignored for the calculation of “continuous service”. 

Respite for the fixed-term contract labours

Until now, only permanent employees on the payroll were entitled to receive statutory benefits, such as Employees’ Provident Fund (EPF), pension, and gratuity, among others.

However, the new rules states that permanent employees including the labour on the fixed-term contract will be “eligible for all statutory benefits available to a permanent workman proportionately according to the period of service rendered by him, even if his period of employment does not extend to the qualifying period of employment required in the statute”.

 In other words, the condition of “Five years of continuous service” holds no meaning now for the fixed-term contract workers.

A word of caution

By making new laws and amending the existing ones, the government is trying to improve the state of a social security system in the country. However, it would be imprudent to depend only on these statutory benefits.

It’s equally important for you to parallelly create your personal retirement plan. The rising cost of living and the growing tendency among employees to retire early makes it more imperative to have a sound retirement planin place.

If you invest in mutual funds , by keeping in mind your investment objectives and the risk appetite, they can help you grow your wealth.

To know how much you need to live a comfortable retired life, use PersonalFN's retirement calculator. It is an online tool that gives you results in less than a few seconds.

P.S. – If you’re looking for assistance to walk the path toward a blissful retired life, PersonalFN's Financial Guardian will assist you in planning your retirement. You can reach out to PersonalFN on +91-22-61361200, or write to info@personalfn.com

Author: PersonalFN Content & Research Team



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