How Do Recent Changes to the Payment of Gratuity Act Affect Employee Benefits?

Amendments in the Payment of Gratuity Act, 1972

As per the Gazette notification issued by the Ministry of Law & Justice in The Gazette of India, dated 29th March 2018, and applicable with effect from the same date, the following amendments in the Payment of Gratuity Act, 1972, are summarized as follows:

1. In section 4 of the principal Act, in sub-section (3), for the words "ten lakh rupees," the words "such amount as may be notified by the Central Government from time to time" shall be substituted. Currently, the amount of gratuity payable to an employee shall not exceed Rupees Ten Lakh. After these amendments, the Central Government can issue a notification regarding the maximum gratuity amount payable at any given time.

2. In section 2A of the principal Act, in sub-section (2), in the Explanation, in clause (iv), for the words "twelve weeks," the words "such period as may be notified by the Central Government from time to time" shall be substituted. Currently, for the purpose of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which, under clause (iv) in the case of a female, she has been on maternity leave; however, the total period of such maternity leave does not exceed twelve weeks. After these amendments, the Central Government can issue a notification regarding additional relaxation on the grounds of maternity leave that will be considered as continuous service.

Regarding Gratuity

The Ministry of Employment and Labour notification dated 29th March 2018 states:

New Delhi, the 29th March 2018

S.O. 1420 (E). In exercise of the powers conferred by sub-section (3) of section 4 of the Payment of Gratuity Act, 1972 (39 of 1972), the Central Government hereby specifies that the amount of gratuity payable to an employee under the said Act shall not exceed twenty lakh rupees.

However, Section 4(5) of the Payment of Gratuity Act 1972 states:

"4(5) Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer."

This clause remains.

Question 1:

Is it not discriminatory to employees who retired just before 29.3.18 as the announcement was made several months earlier?

Question 2:

The Government limit was always for tax-free gratuity. However, most companies are misinterpreting the wording of the 29.3.18 amendment and disregarding section 4(5) that remains, insisting that they cannot pay more than 10 lakhs (increased to 20 lakhs now). Is higher payment based on appointment conditions legal now?

Regards, Jayanthram

Question 1:

Is it not discriminatory to employees who retired just before 29.3.18 as the announcement was made several months earlier? It's always like this. A cut-off date to give effect to any notification is unavoidable for the simple reason that the absence of this cutoff date creates confusion and makes implementation difficult. Imagine in this particular amendment, which is effective from 29.3.2018, if there were no such date indicated, it would mean applying to all past cases without any limit, i.e., from 01/01/0001. Is it possible to implement such a notification? The question you raised is logical but also illogical to implement. There will always be thousands of people affected or discriminated against, as you said, regardless of the date. This question remains irrespective of any date.

Question 2:

The Government limit was always for TAX-FREE gratuity. But most companies are misinterpreting the wording of the 29.3.18 amendment and disregarding section 4(5) that remains, insisting that they cannot pay more than 10 lakhs (increased to 20 lakhs now). Is higher payment based on appointment conditions legal now? You are not correct. There is no gratuity that is fully 'Tax Free' without limit. An employer can pay any amount as gratuity or ex-gratia or in whatever name it may be. IT rules only recognize 'gratuity' under the Payment of Gratuity Act or Gratuity rules or Exgratia Schemes made thereunder or 'Annuity' (as managed by fund managers) subject to the maximum of Rs.20 lakhs. The IT provisions applicable are:

Maximum amount payable under the Gratuity Act, 1972:

Gratuity payable to government employees is fully exempt, which is normally expected not to exceed Rs.20L. For non-government employees covered under the Payment Of Gratuity Act, 1972, the maximum limit for exemption is Rs 20 lakhs, and for any other employees, the maximum limit of exemption is Rs 10 lakhs. [Section 4(3)] Of course, the employer can pay more. An employee also has the right to get more if obtainable under an award or contract with the employer, as made clear under section 4(5).

Tax treatment of gratuity:

For the purpose of exemption of gratuity under sec.10 (10), the employees are divided into three categories:

1. Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees, and employees in Local authority shall be exempt.

2. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972, shall be exempt subject to the following limits: For every completed year of service or part thereof, gratuity shall be paid at the rate of fifteen days' wages based on the rate of wages last drawn by the concerned employee. The amount of gratuity as calculated above shall not exceed Rs. 20,00,000/- (Limit increased to Rs. 20 Lakh with effect from 29.03.2018, earlier limit was Rs. 10 Lakh.)

3. In the case of any other employee, gratuity received shall be exempt, subject to the following exemptions: Exemption shall be limited to half a month's salary (based on the last 10 months average) for each completed year of service or Rs. 20 Lakhs, whichever is less. Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs.20 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) Dated 19.06.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1). Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax subject to provisions mentioned above (Circular No. 573 dated 21.08.90). The ceiling of Rs. 20 lakhs applies to the aggregate of gratuity received from one or more employers in the same or different years.

Taxable under what head:

Gratuity received by an employee on his retirement is taxable under the head “Salary,” and gratuity received by the legal heir is taxable under the head “Income from Other Sources.”

Amended provision of Sec.10(10) of IT Act:

Section 10(10) – Gratuity Exemption The amount received by a Government employee (i.e., Central Government or State Government or local authority) for Death-cum-retirement is fully exempt. Gratuity income received by employees who are covered under the Payment of Gratuity Act, 1972, is exempt from Income tax. The least of the below is exempt:

a) 15 day's salary X years of service

b) Maximum amount i.e., 20 lacs

c) Amount actually received.

Thank you, Mr. Kumar, for the detailed reply. You are right. Anyway, lots of people lost out because of the long delay between the announcement and the actual notification of the amendment.

You are right here also about the taxable limit. My point was not to treat the gratuity amount as fully tax-free. If any contract allows more than 10/20 lakhs (as the case may be), there should be no bar to pay, provided tax is paid beyond 10/20 lakhs, and the excess amount is called ex gratia and not gratuity.

Thanks once again.

Gratuity and Ex Gratia Payments

Employers may pay any amount as 'gratuity'; there is no limit. The limit is only for taxation purposes, and that excess need not be reclassified as anything else. The excess also still remains as 'gratuity' for employers, employees, and others. 'Ex gratia' is a term also used for 'payment in lieu' of a bonus for those entities and employees to whom the Payment of Bonus Act is not applicable, or 'compensation' under the Employees Compensation Act, etc.

Gratuity Administration

Nowadays, gratuity administration is entrusted to fund managers such as LIC, under which employers remit the contributions to these fund managers monthly to take care of 'gratuity' liability concerning eligible exiting employees. This is being implemented under an 'actuarial valuation' formula for those covered under the Companies Act.