Employee Severance Limit Doubled: A Gratuitous Act by the Indian Government!
Gratuity limit for employees has been doubled from the previous limit of INR 1 million (approx. US$ 15,000) to INR 2 million (approx. USD 30,000). Gratuity payable as per the Payment of Gratuity Act, 1972 of India (“Gratuity Act”), is considered as one of the important social security benefit.
The Gratuity Act provides for payment of gratuity upon employment termination, if the employee has been employed for at least 5 years. The calculation of gratuity is based on a formula prescribed by law and is linked to the last drawn wages and the number of years of ‘continuous service’. The amount of gratuity is however subject to a monetary limit. Gratuity, if paid as per the terms of the Gratuity Act, is tax free for the employee.
The Payment of Gratuity (Amendment) Act, 2018 has come into effect on March 29, 2018. As a result of the amendment, the government now has the power to determine and revise the gratuity limit, keeping in mind the inflation and wage increase trends in India. The government has issued additional notifications specifying (a) the gratuity limit as INR 2 million and (b) the period of maternity leave (for the purpose of computation of ‘continuous service’ under the Gratuity Act) as 26 weeks.
In terms of the legislative history, the gratuity limit which was INR 350,000 in 1997, was increased to INR 1 million in 2010. Employees and trade union representatives have been of the view that the threshold under the Gratuity Act has failed to keep pace with the changing economic scenario in India and have demanded that the limit be removed altogether1. While that demand has not been accepted by the government, the current amendment enables the government to revise the gratuity limit from time to time without going through the procedural and time-consuming hassles of amending a legislation. This would enable the government to take quicker actions in terms of revising the limit in the future.
For quite some time now, private sector employees have been hopeful of a revision in the gratuity limit which would bring them at par with their counterparts in the government sector. The wait has finally come to an end. It may just be a double benefit for employees for FY 2018-19 given the recent increase in standard deduction for salary income as per the tax laws. Increased gratuity limits may also help employers from an employee retention perspective, given that the amount of gratuity payable increases with every year of service. In fact, there are already certain progressive companies that pay out the entire gratuity based on the formula without any monetary cap - they will not be affected by this change. The rest of the employers will need to rework their financials (and gratuity policies) to account for a significantly increased liability.
Given that the national elections are on the horizon, the large employee community in India will surely give a thumbs up to the government.