Gratuity ceiling doubled to Rs.

20 lakh:
What does it mean for you?

As per the recommendations of the seventh Pay About 55% of them provided gratuity purely in line
Commission, the Central Government increased the with the PG Act and would be impacted.
gratuity ceiling applicable to central government
employees to INR 20 lakhs (INR 2 Million) in 2016. The remainder have chosen to provide a benefit
Earlier this week, the Cabinet approved a bill which calculated on a different basis altogether, and have
proposes a similar amendment for non-Central the PG Act benefit effectively acting as a minimum.
Government employees. The bill is likely to be tabled Any benefit paid out in excess of the PG Act would
in the next session of Parliament and will look to be taxable as income in the hands of the employee
increase in the gratuity ceiling to the Payment of on receipt of the payment.
Gratuity Act (PG Act)1 itself. The current limit is INR
10 Lakhs (INR 1 Million) which has been in place If an employer / sponsor may be impacted, they
since 2010. The higher limit will also apply to the tax should consider the following:
free amount payable to an employee.
 If the gratuity arrangement currently applies a
The date from which the new provisions will apply ceiling which is less than INR 20 Lakhs (all PG
has not yet been finalised, but this date is likely to lie Act plans would also fall here), quickly assess
in late 2017 / early 2018. As in previous such the impact of the ceiling change on your
updates, the increased limit would apply to gratuity accounts.
already accrued to date as well as accrual in respect
of future service.  The extent of the impact will depend on how
many people, and the extent to which
Impact on employers / sponsors employees are likely to be projected to go above
the current 10Lakh limit by the time they leave or
Companies in India make provisions in their financial retire from the organization. If a company has no
statements for the Gratuity obligation as per the one likely to even reach 10lakh, then the new
relevant accounting standards (AS15 Revised or change will not impact them.
INDAS19, as applicable). However, not all
companies’ financials will be affected by the change.  Ensure the company and the company’s gratuity
An internal study by Willis Towers Watson in 2016 Trust projects anticipated increase in cashflow
showed that about 40% companies already provide requirements for higher projected payouts. This
the benefit with no ceiling to their employees and includes anticipated increase in contributions to
would therefore not be affected by such a change, a Trust (if applicable).
except being able to pay a higher tax-free benefit.
 Even if your gratuity arrangements apply an
overall cap of INR 20 Lakhs or higher, you may

where salary is based on Basic plus Dearness Allowance (DA),

1 and service is calculated on a nearest complete years basis.
The Payment of Gratuity Act 1972 provides that companies with
Under the PG Act, however, the maximum benefit is subject to a
10 or more employees must provide their employees with a
ceiling which is currently INR 10 Lakhs.
gratuity benefit at the time of leaving employment, subject to a
minimum period of service of 5 years. The benefit upon leaving is
broadly calculated as 15/26 x salary at exit x years of service,

Copyright © 2017 Willis Towers Watson. All rights reserved

willistowerswatson.com
 still wish to share the ‘good news’ with your Previous Current PG Proposed
employees as a higher amount of their gratuity Gratuity Act Amendment
benefit will attract tax relief. Payments
Received
Impact on active / ‘in service’ employees Current Benefit Current Benefit
= INR 8L = INR 8L
Most employees who are part of their employers’ Mr A Nil Can accrue an Can accrue an
gratuity arrangement are set to gain from the additional INR additional INR
amendment with the advantages coming in various 2L (tax-free) 12L (tax-free)
forms: Current Benefit Current Benefit
= INR 4L = INR 4L
 The increase in limit applies to the overall Can accrue an Can accrue an
additional INR additional INR
gratuity payouts an individual receives over the INR 5L
Ms B 1L (tax-free) 11L (tax-free)
working lifetime, which can now be higher. (tax-free)
and another and another
INR 5L subject INR 5L subject
 If you have already received the full INR 10 to marginal tax to marginal tax
Lakhs from our previous employers, you can rate rate
accrue another INR 10 Lakhs as a tax-free Current Benefit Current Benefit
gratuity benefit. = INR 10L = INR 10L
Cannot accrue Can accrue an
further benefits additional INR
 If your gratuity benefit has already breached INR
INR 5L Will receive 10L of which
10 Lakh with current employer (see formula in Mr C
(tax-free) INR 5L (tax- 5L (tax-free)
footnote), you can now continue to accrue free) and and marginal
additional benefits up to a total limit of INR 20 marginal tax tax rate will
Lakh tax-free. rate will apply apply on the
on the other 5L other 5L
The following table demonstrates the additional
benefits an individual will receive via the
This article should not be relied upon as formal tax
amendment. For simplicity, the illustrations assume
or legal advice.
that all arrangements allow accrual as per PG Act.
*First published in Money Control

Copyright © 2017 Willis Towers Watson. All rights reserved

willistowerswatson.com
 About the Author

Kulin Patel
Head – Retirement (South Asia)
Willis Towers Watson
[email protected]

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading
global advisory, broking and solutions company that
helps clients around the world turn risk into a path for
growth. With roots dating to 1828, Willis Towers Watson
has 40,000 employees serving more than 140 countries.
We design and deliver solutions that manage risk,
optimise benefits, cultivate talent, and expand the power
of capital to protect and strengthen institutions and
individuals. Our unique perspective allows us to see the
critical intersections between talent, assets and ideas —
the dynamic formula that drives business performance.
Together, we unlock potential.
Learn more at willistowerswatson.com.

Copyright © 2017 Willis Towers Watson. All rights reserved

willistowerswatson.com