Is it time to discard
'minimum five years of service' gratuity rule?
Recently, the central government decided to increase the gratuity limits for
private sector employees as well from Rs 10 lakh to Rs 20 lakh. This is a
welcome step and follows the same principle applied to the central government
employees whose gratuity limit was increased to Rs 20 lakh in July 2016. To
implement these changes, the government will amend both the Payment of Gratuity
Act and the Income
Tax Act. This is because the gratuity received (i.e. computed as per
the Payment of Gratuity Act) is tax free.
This is a welcome step, but the government needs to liberalise the
gratuity rules further. First, the rule about 'minimum five years of service',
set a long time ago, needs to be discarded because labour mobility is quite
high these days. Since very few employees stick with a company for five years,
this needs to be brought down to at least three years.
There is another reason this reduction is needed: since most companies
follow cost-to-the-company (CTC) rules, gratuity is already part of the salary
package. That means an employee, who leaves service before completing 5 years,
is actually forced to give up a part of his or her salary. There may be some
benevolent companies that pay gratuity as a taxable component at the time of
final settlement, but most companies keep it to themselves.
Although the gratuity rules of central government and private sector
employees are aligned to this move, state government employees are still left
out. There are several state governments that still continue with the Rs 10
lakh restrictions on gratuity . Hope they also increase this limit to Rs 20
lakh at the earliest.
Third, ad-hoc increases in limits, such as the recent one, create problems
for employees who retire just before these hikes kick in. For example, consider
an employee who retired in 2016 and got a gratuity of Rs 18 lakh (i.e. Rs 10
lakh tax free and Rs 8 lakh taxable) with another employee who retired in 2017
and got a gratuity of Rs 18 lakh (i.e. entire Rs 18 lakh tax free). To make
these things equal to all, the government need to revise these limits annually
and this can be based on the inflation data published by the government.
Finally, this arbitrary ceiling on gratuity (at Rs 20 lakh) is not
needed because gratuity is calculated based on a well laid-out formula. As per
the Payment of Gratuity Act, employees are eligible to get 15 days salary for
each completed years of service. Gratuity is computed using the formula last
drawn salary×15/26×number of years of service. Please note that only basic
and dearness
allowance (DA) is considered as salary here. Since there are only 26
working days a month, the same is used instead of 30 days for
calculations.
Now assume that an employee's gratuity value comes to Rs 23 lakh.Here
again, some benevolent companies may pay this gratuity as a taxable component
(i.e. Rs 20 lakh as tax free and Rs 3 lakh as taxable), but other companies may
keep it to themselves. To avoid such situations, the government should remove
ceiling from the Payment of Gratuity Act. And if the government wants to
restrict tax benefit on gratuity (i.e. to avoid misuse of this provision), it
can retain the restrictions under the Income Tax Act.
Source : The Economic Times
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