There is good news for private sector employees retiring from their jobs soon. The maximum amount of tax free gratuity under the Payment Of Gratuity Act (1972) has been raised from Rs 10 lakh to Rs 20 lakh. This effectively means that in the initial retirement period, a person can now start with a much higher amount of tax-free retirement money thanks to the new gratuity policy. This will also help a person postpone the use of other retirement investments. They, in turn, can be used later when the person gets the benefits of senior citizens tax benefits. Let’s take a closer look at what has changed.  

Before the latest development, in cases where the gratuity law under Payment of Gratuity Act was applicable and gratuity payment received from an employer was the least of Rs 10 lakh, actual gratuity received and 15 days’ salary, based on the salary last drawn multiplied by the number of years in employment.

Therefore, if an employee had worked in a company for 20 years and his last drawn salary (plus dearness allowance) was Rs 1.5 lakh a month, according to gratuity calculation, he would be eligible for a gratuity of Rs 17.3 lakh. Earlier, the maximum amount of tax-free gratuity for him was Rs 10 lakh. Now, the same employee would be eligible for tax-free gratuity of Rs 17.3 lakh since the lower limit of Rs 10 lakh does not apply. Needless to say, this move will benefit only employees with a high salary and have stayed in employment in the same establishment for a long period.