Tax-free gratuity ceiling may treble to Rs 10 lakh

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NEW DELHI: In a move that���s likely to benefit\nthe salaried, the labour ministry is mulling a proposal to virtually treble the\nceiling on tax-free gratuity to Rs 10 lakh from Rs 3.5 lakh now.

The\nministry has sought comments from workers and employers, and a decision would be\ntaken after considering the views of both sides. If the proposal is cleared, the\nministry would urge the finance ministry to hike the tax-free gratuity limit to\nRs 10 lakh, government sources said.

Though the ceiling on gratuity\nis Rs 3.5 lakh, nothing prevents employers from doling out more. However,\nincome-tax authorities demand tax if a private or PSU employer exceeds this\nceiling. If an employee is entitled to a lesser amount and his/her employer\ndecides to give Rs 3.5 lakh, tax has to be paid on the difference. In the case\nof government employees, however, no tax is levied even if the ceiling is\nexceeded.

While varying interpretations bring in an element of\nanomaly, the Gratuity Act, 1972, provides that for every completed year of\nservice the employer shall pay gratuity to an employee at the rate of 15\ndays��� wages, based on the basic salary last drawn.

The Act also\nprovides that the amount of gratuity payable shall not exceed Rs 3.5 lakh. There\nis, however, no restriction on an employee negotiating a better gratuity term\nwith the employer. Some companies, in fact, grant a month���s salary for\nevery completed year after 14 years of service.

The move to hike the\ngratuity ceiling would, therefore, clear the confusion over the tax-free limit,\nbesides allowing employees to benefit from higher gratuity. Many employers\nrefuse gratuity over Rs 3.5 lakh even if the actual amount worked out by the\nformula mentioned in the Act is higher.

Any amount in excess of 15\ndays��� last-drawn salary for every year of service or Rs 3.5 lakh is added\nto the employee���s salary and taxed in the year he receives it.\nEffectively, this means a cap of Rs 3.5 lakh on tax-free\ngratuity.

Raising the ceiling on tax-free gratuity benefits\nnon-government employees with high salaries. ���Gratuity was not rising in\nline with inflation. Keeping in mind high inflation, this can be a good\nstep,��� said Gautam Kakkar, business leader at Mercer���s retirement\npractice in India.

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The\nhigher limit should also help employers retain talent, as high gratuity would\ndeter employees from switching jobs quickly. ���The modification will\nencourage employees to stay longer in an organisation, and accumulate hefty\ngratuity,��� said Arun Mahapatra, managing partner (in charge of India) at\nHeidrick and Struggles. ���This change could become a good retention tool.\nEmployers would welcome the move because it gives a big incentive to workers to\nstay on,��� he added.

The move will help the retirement plans of\nemployees by hiking the tax-free lump sum component. This is particularly\nimportant now as the employees��� provident fund organisation (EPFO)\nrecently scrapped the freedom provided to subscribers to withdraw one-third of\ntheir pension corpus at the time of retirement.