Congrats loyal employees – Gratuity limit raised from 10 lacs to 20 lacs

In a significant move that brings relief and joy to millions of hardworking employees across India, the government has raised the gratuity limit from ₹10 lacs to ₹20 lacs. This change marks a major step toward improving financial security for loyal employees who have dedicated years of service to their organizations.

Gratuity is more than just a financial benefit—it's a token of appreciation for an employee's long-term contribution and loyalty. The increase in the gratuity ceiling comes as a welcome change, especially in a time when inflation and rising living costs have put pressure on employees’ financial health. This decision will directly enhance retirement benefits, increase financial stability, and encourage employee retention.

In this blog, we’ll explore the significance of gratuity, the details of the recent change, how it benefits employees and employers, and the broader implications for the Indian workforce and economy.

1. Understanding Gratuity

What is Gratuity?

Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for the services rendered over a period of time. It is governed by the Payment of Gratuity Act, 1972 and serves as a retirement benefit for employees in both the public and private sectors.

Gratuity is essentially a reward for loyalty and long-term service. It helps employees secure their post-retirement life by providing them with a financial cushion. Unlike a regular salary or bonus, gratuity is specifically intended to support employees in their non-working years.

Purpose and Importance

• Recognition of Service: It rewards employees for their commitment and loyalty.
• Retirement Support: Helps employees manage their post-retirement expenses.
• Financial Security: Acts as a safety net during emergencies or financial instability.

Historical Background

The Payment of Gratuity Act, 1972 was introduced to protect the rights of employees and ensure they are financially compensated for their long-term service. Over the years, the gratuity limit has been revised periodically to account for inflation and changing economic conditions.

2. The Recent Change – From ₹10 Lacs to ₹20 Lacs

What’s New?

Until recently, the maximum gratuity amount payable to employees was capped at ₹10 lacs. However, in a landmark decision, the government has now raised this limit to ₹20 lacs.

Why the Change?

• The change aligns with the recommendations made after the implementation of the 7th Pay Commission.
• The increase reflects rising inflation and the higher cost of living.
• The revision aims to bring parity between government and private sector employees regarding gratuity benefits.

When Was It Implemented?

The revised gratuity limit was officially notified and came into effect from March 29, 2018. However, its impact continues to grow as more employees benefit from the increased limit.

3. Why the Change Matters

Increased Financial Security

With the increased limit, employees now have access to larger post-retirement benefits, improving their financial standing and reducing the risk of financial insecurity after retirement.

Boost to Employee Morale and Loyalty

Knowing that their long-term service will be rewarded more generously encourages employees to stay committed to their organizations, enhancing overall job satisfaction.

Impact on Retirement Planning

The increased gratuity amount makes it easier for employees to plan their retirement with greater confidence, knowing they have a substantial financial cushion to rely on.

4. Eligibility for Gratuity

To qualify for gratuity under the Payment of Gratuity Act, 1972, an employee must meet the following conditions:

✅ Completed at least 5 years of continuous service with the employer.
✅ Applicable to employees in factories, mines, oilfields, plantations, ports, railways, shops, or other establishments with 10 or more employees.
✅ In the case of death or disability, the 5-year service rule is waived, and gratuity is paid to the employee's nominee or legal heir.

5. How Gratuity is Calculated

The formula for gratuity calculation is simple:

Gratuity = (Last drawn Salary) * (Number of years of Service) * 15 / 26

Under the new limit, an employee with a last drawn salary of ₹1,00,000 and 30 years of service can now receive a gratuity payout of up to ₹20 lacs, whereas earlier it would have been capped at ₹10 lacs

6. Tax Implications of the New Gratuity Limit

Previous Tax-Free Limit

Earlier, gratuity payments up to ₹10 lacs were exempt from income tax.

New Tax-Free Limit

Now, gratuity payments up to ₹20 lacs are exempt from income tax under Section 10(10) of the Income Tax Act.

Tax Planning Tips:

• Plan investments to avoid slipping into a higher tax bracket after receiving gratuity.
• Use gratuity funds to invest in tax-saving instruments such as PPF, NPS, and tax-free bonds.

7. Impact on Employers

Increased Financial Liability

Employers now need to allocate higher funds for gratuity payouts, especially for senior employees with long service records.

Financial Planning for Employers

• Create a dedicated gratuity fund.
• Purchase group gratuity insurance policies to manage payouts.
• Work with financial advisors to balance gratuity liabilities with business growth.

8. Benefits to the Economy and Workforce

• Encourages employee retention and reduces turnover.
• Enhances job security and financial stability.
• Strengthens the bond between employees and employers, leading to a more productive workforce.

9. Challenges and Concerns

For Employers:

• Increased financial burden on smaller businesses.
• Need to manage cash flow and reserves to cover gratuity payouts.

For Employees:

• Risk of gratuity disputes due to miscalculation.
• Need for better understanding of eligibility and calculation methods.

10. Expert Opinions and Market Reactions

According to financial experts:
"This increase in gratuity limit reflects the government’s commitment to improving the financial well-being of employees. It will strengthen employee confidence and encourage long-term service."

HR professionals have welcomed the change, noting that it will boost employee morale and increase workforce stability.

11. What Employees Should Do Next

✅ Check Your Eligibility: Ensure that you meet the minimum service requirements.
✅ Calculate Your Gratuity: Use the formula to estimate your payout.
✅ Plan Investments: Invest your gratuity wisely to secure long-term financial stability.
✅ Consult a Financial Advisor: Get expert advice on managing your gratuity funds effectively.

The increase in the gratuity limit from ₹10 lacs to ₹20 lacs is a game-changer for employees across India. It reflects the government’s recognition of employee loyalty and its commitment to improving financial security for the workforce.

For employees, this means a more secure future and better retirement planning. For employers, it presents an opportunity to strengthen employee relations and create a more loyal and motivated workforce.

This is not just a financial change—it’s a step toward building a more stable, secure, and prosperous future for India’s working population.

So, if you’re a long-serving employee—congratulations! Your loyalty and dedication are now more valuable than ever. 🎉