Gratuity Confusion: Should My Company Pay More Than the 20L Limit After 27 Years?

I worked for a company for 27 years, and as per calculation, the gratuity amount exceeds 20L. However, the company states that with respect to Notification SO 1420 E dated 29th Mar 2018, the maximum amount payable will be 20L. Please suggest if the 20L limit is for determining tax liability, or if 20L is the maximum limit under any circumstances, or if the company should pay the actual amount as per calculation, making 20L non-taxable and the balance taxable.

Gratuity Payment Limitations

Rs 20 lakhs is the maximum amount of gratuity payable by the employer as per the Payment of Gratuity Act. As such, no employer has any legal liability to pay gratuity over and above this amount, even if the total amount would exceed Rs 20 lakhs. Certainly, if the employer is ready to pay, they can pay an amount exceeding Rs 20 lakhs, deducting tax from the amount over Rs 20 lakhs at the prescribed rate of the slab in which the employee would fall. But if the employer is not willing to pay the actual gratuity which is above Rs 20 lakhs, you cannot do anything.

Hi, As per the Gratuity Act, twenty lakhs will be the upper ceiling limit, and it will be tax-free. Anything over and above twenty lakhs will be subject to tax. There should also be a predetermined contract or agreement between the employer and the employee stating that the gratuity payment will be made on an actual calculation basis without restricting it to the upper ceiling limit. Please check your appointment order or employment contract terms. In other words, it depends on the policy of the employer whether the gratuity payment will be subject to the upper ceiling limit of twenty lakhs or actual calculation in case it exceeds twenty lakhs.

What is the employer's legal liability to pay gratuity if the calculation amount exceeds 20 lakh?

Please clarify whether this is mentioned anywhere in the Gratuity Act. An attached copy is also provided for reference.

The employer's liability under the Payment of Gratuity Act is outlined in section 4(3) of the Act, which states:

"The amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government from time to time."

Accordingly, the Central Government will notify the maximum amount payable periodically. The current notification, S.O. 1420 (E), states:

"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."

Please find the attached notification for more details.

Hi Deepak,

Understanding Gratuity and Its Limits

Gratuity is a statutory benefit provided to employees by the employer under the Payment of Gratuity Act, 1972 in India. The act specifies the conditions under which gratuity is payable and the amount of gratuity payable.

The 20 Lakh Limit on Gratuity

Regarding the limit of 20 lakhs, it's essential to understand the context. The notification SO 1420 E dated 29th March 2018 did indeed introduce a cap of 20 lakhs on the maximum amount of gratuity payable under the Payment of Gratuity Act, 1972. This means that regardless of the length of service or the actual calculation, the maximum gratuity payable to an employee cannot exceed 20 lakhs.

This limit is not for determining tax liability; it's a cap on the amount of gratuity payable by the employer. Anything beyond this limit is not statutorily mandated and is at the discretion of the employer.

Tax Implications of Gratuity

However, any gratuity received by an employee up to Rs. 20 lakhs is exempt from income tax under Section 10(10) of the Income Tax Act, 1961. So, if an employee receives gratuity of up to 20 lakhs, it will be tax-free. Any amount above 20 lakhs will be taxable as per the income tax laws applicable at the time of receipt.

Advice for Exceeding Gratuity Limits

In your case, if your gratuity amount exceeds 20 lakhs, the company is correct in stating that they are bound by the cap of 20 lakhs as per the notification. They should pay you the gratuity amount as per the calculation up to 20 lakhs, which will be tax-free. Any amount beyond that will be taxable. However, you may want to consult with a legal or financial advisor for personalized advice based on your specific circumstances.

Thanks

Statutory provisions are well explained. However, nobody could deny if the employer is prepared to pay gratuity exceeding this cap of Rs. 20 lakhs. Many of us will know this; those in need, please take note of this -

Sec. 4. Payment of Gratuity

(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:

(a) on his superannuation, or
(b) on his retirement or resignation,
(c) on his death or disablement due to accident or disease:

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

[Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs are minor, the share of such a minor shall be deposited with the Controlling Authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority].

Explanation: For the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement.

(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned:

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee who is employed in a seasonal establishment, and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season.

Explanation: In the case of a monthly rated employee, the fifteen days' wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.

(3) The amount of gratuity payable to an employee shall not exceed 20 lakhs Rs. vide notification dated 29.3.2018 copy attached to the post of Mr. Madhu above.

(4) For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.

(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.

So far as TDS is concerned, gratuity over and above Rs. 20 L will be added to the 'taxable income' for the year and taxed as per the slab rates applicable either under the new regime or old regime as the case may be.