Gratuity Limit Confusion: Is 25 Years the Max for a 30-Year Employee? Seeking Expert Opinions

An employee worked in a private organization for 30 years and passed away during service. The gratuity settled was for 25 years. The respective management person was saying that the maximum number of years will be taken as only 25 years, even though the employee worked for 30 years. Is there any such rule under the Gratuity Act?

Seeking the valuable opinion of fellow experts.

Dear Bala, so far as the limitation under the Payment of Gratuity Act, 1972 is concerned, it is only on the maximum amount of gratuity payable to an employee, which stands at Rs. 20 lakh. At times, one can be inadvertent about the actual legal provisions due to a lack of in-depth reading or hearsay. Therefore, you may ask the manager who says so about the statutory ceiling on the number of years of service rendered by the employee, to quote the authority for his statement.

If the employee files a claim before the Controlling Authority under the Act, he is sure to get the arrears of gratuity with a simple interest at 10% for the entire period of default.

Gratuity Entitlement and Calculation

Employees are entitled to gratuity after five years of continuous work in the same company. The formula for calculation is Basic Salary * years of service * 15/26. Gratuity is a benefit given by the employer to employees. A recently approved amendment by the Centre has increased the maximum limit of gratuity to Rs 20 lakh, making it tax-exempt compared to the previous ceiling of Rs 10 lakh under Section 10(10) of the Income Tax Act.

Maximum Years Considered for Gratuity

If the company wishes to pay the maximum number of years, only 25 years will be taken into account. Even if an employee worked for 30 years, only up to 25 years will be considered, but any amount above the ceiling should be taxable.

Thanks & Regards,
Sumit Kumar Saxena

Dear Sumit, Earlier, the maximum amount of gratuity under the PGA, 1972 was limited to 20 months' salary. Gradually, it was increased in terms of money and as of today, it stands at Rs. 20 lakh. Regardless of the number of years of qualifying service rendered by the employee, it can be limited to the ceiling. However, if the employer wishes, they can pay the actual amount exceeding the ceiling. The tax liability in such a case falls on the employee for any amount in excess of the ceiling. Therefore, it is not necessary to restrict the service to 25 years as it can lead to disputes.