Gratuity Act Update: What's the Maximum Payout and When Does It Apply?

Please let me know the maximum amount payable under the latest amended Gratuity Act and from when it is applicable or in force.

Dear,

There is no amendment in the act, and still, the maximum limit is 3.5 lacs only.

Regards,
JS Malik

What is the present status of the proposal for IT exemption of gratuity from 3.5 lakhs to 10 lakhs?

Thank you.

Hi Mr. Anurag Jain,

The Government of India has only proposed increasing the current gratuity limit from 3.5 lakhs to 10 lakhs, but no notification, enactment, or amendment has been made yet. As of today, the gratuity limit remains at 3.5 lakhs, as Mr. Malik mentioned.

Mohan Rao
Manager HR

As per the 6th Pay Commission notification, the gratuity limit has been increased from 3.5 lakhs to 10 lakhs, subject to eligibility, whichever is less. This is retrospectively effective from 1.1.2006 for Central Govt. Employees and from 1.1.2007 for the PSU employees.

The proposal is for increasing the exemption limit for Income Tax Exemption under Section 10(10) of the Income Tax Act, which, according to me, is still pending. If any employee wishes to take the gratuity as per the 6th Pay Commission, he/she can avail of the same after paying income tax, which can be claimed back after the proposal is approved by the Finance Ministry for IT Exemption.

So, as of now, the Gratuity payable is Rs. 10 lakhs subject to the eligible amount or 10 lakhs, whichever is less.

Hi Sushi,

Could you please provide the notification from the government regarding the increase in the ceiling for private sectors?

Dear Folks,

As there are many discussions on this thread, can anyone finalize what is the maximum amount to be paid as gratuity and the current tax exemption?

Awaiting your replies...

Jai

Dear All,

In my opinion, there is no limit on the payment of gratuity. It is payable based on the last drawn basic salary, but as a practice, the payment is limited to Rs. 3.5 lakhs, which is the exemption limit under the Income Tax Act. The actual amount due, based on half a month's salary for each completed year of service, can be paid even if it exceeds Rs. 3.5 lakhs, and the recipient would have to pay tax on the excess amount.

I hope the seniors would also agree with my opinion. Kindly correct me if I am wrong.

Thanks & Regards, Avika

Hi Mr. Avika,

Let me correct you: the gratuity payable per year of service is 15 days of the last paid salary, i.e., total last paid salary divided by 26 days multiplied by 15 days equals the per year gratuity. If we calculate it as a percentage of the salary, it comes to 57.69%, which is not half a month's salary as you mentioned earlier. For the rest, I do agree with you. If I am mistaken, please correct me.

Mohan Rao

Mr. Avik,

As per the Payment of Gratuity Act 1972, Section 4(3):

The amount of gratuity payable to an employee shall not exceed three lakhs and fifty thousand rupees. However, there is a proposal to increase the amount to 10.00 lakhs with IT exemption pending with the government. This limit has already been increased to 10.00 lakhs for only central government employees. Some great companies are paying gratuity without any ceiling.

Hi,

Currently, the gratuity amount is 10 lakhs. However, I am curious to know which book mentions this amount, as all the books I have come across state that 3.5 lakh is the maximum amount of gratuity.

Thanks,
AJAY KUMAR

For Central PSU executives, the following was the order:

"In pursuance of the Presidential Directives issued by the Ministry of Commerce & Industry, Government of India, vide order No. 11/9/2009-FT(M&O) dated 27th April 2009,"

whereby,

9. Gratuity & Leave Encashment:

9.1 Subject to other terms and conditions in vogue from time to time, the ceiling on the payment of gratuity stands revised from Rs. 3.50 lakhs to Rs. 10 lakhs for those executives who have retired on or after 01/01/2007 or who will retire in the future.

9.2 For Executives including those who have retired and have availed gratuity/leave encashment on or after 1.1.2007 till the date of issuance of this office order will be eligible for payment of arrears on account of gratuity/leave encashment taking the revised salary into consideration.

9.3 Executives who have ceased to be in the services of the Company on or after 1st January 2007 due to superannuation, death, voluntary retirement, and valid resignation will be eligible for arrears of pay & allowances, in terms of this office order on a pro-rata basis, wherever due. In the event of the death of the beneficiary, payment of arrears shall be subject to the submission of a written request from the Nominee(s).

In my opinion, the same gratuity norms are provided for Central Govt. Employees for whom the order came into effect from 1.1.2006, whereas the effective date is 1.1.2007 for PSU executives.

As someone mentioned above, even I feel there is no upper limit for gratuity for the private sector, but the Income Tax exemption is for Rs. 3.5 lakhs as of now. A proposal has been sent for increasing this exemption to 10 lakhs.

Hello Mr. KM Rao,

As per my understanding, the formula for gratuity is last drawn basic salary * 15/26 * number of years of continuous service. Please correct me if I am wrong.

Regards,
Jai

The Payment of Gratuity Act-1972

1. When is gratuity applicable to an employee?

Ans: Gratuity is applicable to a permanent employee who completes 5 years of continuous service with the organization.

2. What is the maximum Gratuity payable to an employee?

Ans: The maximum Gratuity payable to an employee is Three Lakhs Fifty Thousand only.

3. When is an employee eligible for getting gratuity?

Ans: An employee has to complete continuous service of 5 years. However, after the ruling of the Madras High Court, if there are 240 working days in the 5th year, even then an employee is eligible for the gratuity.

4. What if an employee completes 4 years & 6 months of service, is he eligible for Gratuity?

Ans: No, but where an employee has completed 4 years & 240 days of continuous service in the 5th year, he is eligible for the Gratuity.

5. What if an employee expires before completing 5 years of continuous service, is he eligible for Gratuity?

Ans: In case the employee expires before completing 5 years, gratuity could be paid to the nominee of the deceased employee provided the employee has completed a year of service.

6. Is a retrenched employee entitled to gratuity?

Ans: Yes, a retrenched employee is also entitled to gratuity.

Hi Mr. Shankar,

You are right; the formula is correct. In my thread, I clarified the per-year calculation for Gratuity, not for the entire service of the employee.

Mohan Rao