In layman’s terms gratuity means a part of the salary which is paid by an employer to an employee when the latter leaves the organization after having completed at least 5 years of continuous service there.
It is important social security legislation to the wage earning population in industries, factories and establishments. It provides social security to workers after retirement, whether retirement happens due to superannuation, physical disablement or impairment of a vital body part.
It applies to establishments employing 10 people or more and is tax free under the Income Tax Act.
Raised gratuity for private sector workers – The amount of gratuity for central government employees doubled from Rs 10 to Rs 20 lakhs after implementation of the Seventh Pay Commission. However, private sector employees were deprived of the same benefit.
After the passage of the Payment of Gratuity(Amendment) Bill, 2018, private sector employees are now entitled to receive tax free gratuity of up to Rs 20 lakhs at par with the government employees.
The bill ensures harmony among employees in the private sector and public sector undertakings/ autonomous organizations under Government of India who are not covered under the Central Civil Services (Pension) Rules, 1972.
These private sector employees will now be entitled to receive a higher amount of gratuity at par with their government sector counterparts. If an employee has already got the full Rs 10 lakhs from earlier employers he can now accrue another Rs 10 lakhs as tax free gratuity benefit.
However, in order to achieve the upper limit of gratuity of Rs 20 lakhs on retirement, someone with a salary of Rs 10 lakhs per annum will need to work about 41 years.
Calculation of service for women on maternity – The Payment of Gratuity (Amendment) Bill has also amended the provisions related to the calculation of continuous service in case of female employees who are on maternity leave.
In accordance with the Maternity Benefit (Amendment) Act, 2017 which increased the maternity leave to 26 weeks, the Payment of Gratuity (Amendment) Bill recommends that the maternity leave of 26 weeks will be considered as continuation of service for the purpose of calculating the amount of gratuity.
Furthermore, after the enactment of the Act, the power to notify the ceiling of the amount of gratuity under the Payment of Gratuity Act, 1972 shall stand delegated to the Central Government. This will allow revision from time to time, keeping in view the increase in wage, inflation and future pay commissions.