Any Notification released on Gratuity ceiling enhancement from 3.5 to 10L. If so, please share - Vipparthi
From India, Hyderabad
1From India, Hyderabad
The notification on the gratuity ceiling limit has been published on 18th May. Sad to inform that the efective date is from 24th May 2010.
From India, Kochi
From India, Kochi
The notification on the gratuity ceiling limit has been published on 18th May. Sad to inform that the efective date is from 24th May 2010. ![]()
From India, Kochi
From India, Kochi
Post amendment of the Payment of the Gratuity Act, the first response is whether the Income tax limit of 3.5 Lakh for gratuity has increased for employers and employees.
Let us understand the provision about Gratuity as per the Income Tax Act and its impact:
Employer:
Under Sec 36 (i) (iv) of the Income Tax Act, 1961, any contributions made by the Employer to an approved gratuity trust up to a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer.
Impact on change in the limit Contribution funding and Income Tax:
Employers are driven by AS 15 Revised for accounting of P&L expense. However, this does not have to drive the actual contribution paid towards the benefit provision.
The level of contributions into a funded scheme would be impacted in terms of covering the additional cost in respect of increased accrued benefit promises and the increased cost of further benefit accrual.
Increase in the gratuity ceiling will result in a larger benefit payment. Gratuity trusts would be required to revisit their asset allocation and make necessary adjustments to ensure a sufficient level of liquidity in the fund.
Employers currently fund their gratuity scheme by ensuring the scheme is fully funded, i.e., asset value equals the Present Benefit Obligation (PBO) on an annual basis. The increase in the PBO due to the increase in the ceiling may result in a situation where employers may not afford to fully fund the PBO immediately.
Under Sec 36 (i) (iv), any contributions made by the Employer to an approved gratuity trust up to a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer. It is currently unclear whether any relaxation of this will occur post the change in the gratuity limits. Also, there has been no precedence of the same in the past.
Employee:
As per the current Income Tax Act, Section 10 (10), employees have been divided into three categories:
1. Employee of Central/State Government and Local bodies: Gratuity received by these employees is fully exempted without any limit.
2. Employee covered under the Payment of Gratuity Act: Amount as per the Gratuity Act is fully exempted. Income Tax has not defined/set any limit for such employees. As the Income Tax Act only refers to the limit specified in the Payment of Gratuity Act, these employees are fully exempt up to Rs. 10 lakhs.
3. Other employees: For other remaining employees, the limit is defined under the Income Tax Act, which is currently at 3,50,000. Many PSUs, not covered under the State or Central Govt. definition as per 1 and 2 above, have started to pay gratuity as per the Sixth Pay Commission with a maximum of up to 10 lakh. Also, private employers who pay higher gratuity benefits shall be impacted by the change in the limit. Any amount in excess of 3.5 lakh is taxable in the hands of such employees. A separate notification under this subclause [10(10)(iii)] is required to enable other employees to get tax exemption as the limit is related to the date of retirement/resignation and not to the date of receipt.
In the past, every time the Government has raised this limit with retrospective effect.
Increase in Limit old History (recent three) is given below:
Exemption limit raised from Rs. 2,50,000 to Rs. 3,50,000 in relation to employees who retire/terminated/resigned or become incapacitated prior to such retirement or die on or after 24-9-1997 (date of Notification 20.1.1999-No. 10772 [F. No. 200/77/97-IT(A-I)])
Exemption limit of Rs.1,00,000 raised to Rs. 2,50,000 in relation to employees who retire/terminated/resigned or become incapacitated prior to such retirement or die on or after 1-4-1995 (Notification: No. SO 394, dated 1-2-1996.)
Exemption limit in relation to employees who retire or become incapacitated prior to such retirement or die, on or after 1-4-1988, or whose employment is terminated on or after 1-4-1988 (Notification: No. GSR 405, dated 28-4-1988.)
Further section 10(10) (iii) says that the limit under this subclause should be notified in accordance with the limit applicable to central Govt. employees. So sooner or later, the limit under this section will also be raised to 10 Lakh, and the expectation is that it will be increased with retrospective effect from 01.01.2006.
Hence, the answer is that the present limit is not enhanced for the "other employee" category.
From India, Mumbai
Let us understand the provision about Gratuity as per the Income Tax Act and its impact:
Employer:
Under Sec 36 (i) (iv) of the Income Tax Act, 1961, any contributions made by the Employer to an approved gratuity trust up to a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer.
Impact on change in the limit Contribution funding and Income Tax:
Employers are driven by AS 15 Revised for accounting of P&L expense. However, this does not have to drive the actual contribution paid towards the benefit provision.
The level of contributions into a funded scheme would be impacted in terms of covering the additional cost in respect of increased accrued benefit promises and the increased cost of further benefit accrual.
Increase in the gratuity ceiling will result in a larger benefit payment. Gratuity trusts would be required to revisit their asset allocation and make necessary adjustments to ensure a sufficient level of liquidity in the fund.
Employers currently fund their gratuity scheme by ensuring the scheme is fully funded, i.e., asset value equals the Present Benefit Obligation (PBO) on an annual basis. The increase in the PBO due to the increase in the ceiling may result in a situation where employers may not afford to fully fund the PBO immediately.
Under Sec 36 (i) (iv), any contributions made by the Employer to an approved gratuity trust up to a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer. It is currently unclear whether any relaxation of this will occur post the change in the gratuity limits. Also, there has been no precedence of the same in the past.
Employee:
As per the current Income Tax Act, Section 10 (10), employees have been divided into three categories:
1. Employee of Central/State Government and Local bodies: Gratuity received by these employees is fully exempted without any limit.
2. Employee covered under the Payment of Gratuity Act: Amount as per the Gratuity Act is fully exempted. Income Tax has not defined/set any limit for such employees. As the Income Tax Act only refers to the limit specified in the Payment of Gratuity Act, these employees are fully exempt up to Rs. 10 lakhs.
3. Other employees: For other remaining employees, the limit is defined under the Income Tax Act, which is currently at 3,50,000. Many PSUs, not covered under the State or Central Govt. definition as per 1 and 2 above, have started to pay gratuity as per the Sixth Pay Commission with a maximum of up to 10 lakh. Also, private employers who pay higher gratuity benefits shall be impacted by the change in the limit. Any amount in excess of 3.5 lakh is taxable in the hands of such employees. A separate notification under this subclause [10(10)(iii)] is required to enable other employees to get tax exemption as the limit is related to the date of retirement/resignation and not to the date of receipt.
In the past, every time the Government has raised this limit with retrospective effect.
Increase in Limit old History (recent three) is given below:
Exemption limit raised from Rs. 2,50,000 to Rs. 3,50,000 in relation to employees who retire/terminated/resigned or become incapacitated prior to such retirement or die on or after 24-9-1997 (date of Notification 20.1.1999-No. 10772 [F. No. 200/77/97-IT(A-I)])
Exemption limit of Rs.1,00,000 raised to Rs. 2,50,000 in relation to employees who retire/terminated/resigned or become incapacitated prior to such retirement or die on or after 1-4-1995 (Notification: No. SO 394, dated 1-2-1996.)
Exemption limit in relation to employees who retire or become incapacitated prior to such retirement or die, on or after 1-4-1988, or whose employment is terminated on or after 1-4-1988 (Notification: No. GSR 405, dated 28-4-1988.)
Further section 10(10) (iii) says that the limit under this subclause should be notified in accordance with the limit applicable to central Govt. employees. So sooner or later, the limit under this section will also be raised to 10 Lakh, and the expectation is that it will be increased with retrospective effect from 01.01.2006.
Hence, the answer is that the present limit is not enhanced for the "other employee" category.
From India, Mumbai
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