Government doubles income tax exemption for gratuity, decision to benefit all PSU employees

Union FM Jaitley

THE government has decided to double tax-free gratuity limit to Rs 20 lakh will benefit public and private sector employees.
The government in Budget 2019-20 also announced hiking of tax free gratuity to Rs 20 lakh for employees not covered under the Gratuity Act having service of more than five years.
"Income Tax Exemption for Gratuity under Section 10(10)(iii) of the Income Tax Act has been enhanced to Rs 20 lakh. Would benefit all PSU employees... and other employees not covered by Payment of Gratuity Act," Finance Minister Arun Jaitley said in a tweet.
Parliament last year passed Payment of Gratuity (Amendment) Bill, 2018, enabling the government to raise the limit of tax-free gratuity to Rs 20 lakh and to fix...
the period of maternity leave qualifying as continuous service period through an executive order.
According to Finance Minister Arun Jaitley, the government's recent move to double the tax-free gratuity limit to Rs 20 lakh will benefit public as well as private sector employees.  "Income Tax Exemption for Gratuity under Section 10(10)(iii) of the Income Tax Act has been enhanced to Rs. 20 lakh. Would benefit all PSU employees and other employees not covered by Payment of Gratuity Act," he tweeted.
As per Section 10 (10), an employee is eligible for gratuity on retiring after at least five years of continuous, full-time employment with an organisation employing 10 or more people.
Gratuity is a one-time big income for those retiring after years of hard work and it pinches really hard if you have to pay tax on this amount. As salary levels have grown significantly over the years, so has the gratuity amount that employees get. The Modi government had decided to double the income tax exemption on gratuity income in the Interim Budget in order to accommodate rising inflation and salary levels. This move will result in huge savings for people with long years of service.
The government had doubled the limit for tax-free gratuity to Rs 20 lakh in the private sector back in March last year with the passing of the Payment of Gratuity (Amendment) Bill, 2018.  After implementation of the 7th Central Pay Commission, the ceiling of gratuity amount for central government employees, too, doubled to Rs 20 lakh.
The amount of gratuity can be calculated using the following formula: Last drawn basic salary along with dearness allowance X number of years in service X 15/26. Assume you have worked with ABC company for a period of 15 years and your last drawn basic salary along with dearness allowance was Rs 30,000. Hence, the gratuity you are looking at is Rs 30000 x 15 x 15/26 or Rs 2,59,615.
Parliament last year passed the bill empowering the government to fix the amount of tax free gratuity and the period of maternity leave with an executive order.
The legislation enabled the government to enhance the ceiling of tax free gratuity to Rs 20 lakh from the existing Rs 10 lakh for employees falling under the Payment of Gratuity Act.
After the implementation of the 7th Pay Commission, the ceiling of gratuity amount for central government employees was doubled to Rs 20 lakh.
It also allows the government to fix the period of maternity leave for female employees as deemed to be in continuous service in place of the existing 12 weeks.
The amendment to the payment of gratuity law comes in the backdrop of Maternity Benefit (Amendment) Act, 2017 enhancing the maximum maternity leave period to 26 weeks.