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Gratuity Of Upto Rs20 Lakh Are Tax Free

The Modi government on Thursday notified doubling of the limit of tax-free gratuity to Rs 20 lakh in the private sector. While a large number of private sector employees have welcomed this development, some feel that gratuity should not be part of one’s salary and be given separately as not all employees are able to avail this benefit. That is because only those employees, who complete at least 5 years in an organisation, are entitled to gratuity, while those who change their jobs before 5 years are not able to make any use of it. And if it is part of one’s salary and is deducted from one’s salary every month, then it a loss for employees changing jobs frequently while the organisations deducting it get benefited.


Another argument is that despite their willingness to change their jobs, many employees are reluctant to do so before 5 years because of the fear of losing on gratuity. Therefore, gratuity being part of one’s salary doesn’t make any sense and, in fact, locks up an employee. If it is given or invested separately, irrespective of one’s years of service, that will be more beneficial for an employee.

Surprisingly, while gratuity is part of salary (CTC) in some organisations, in others that is not the case and is contributed by the company. This explains why even experts have different views on this.

“Gratuity isn’t part of CTC and in my view it shouldn’t be considered part of CTC as it is neither payable monthly or annually. An employee who completes 4 years and 240 days of continuous service becomes eligible for it. Many organisations, however, have started adding this as a monthly component to make the compensation structure look more attractive to a prospective candidate,” says Rituparna Chakraborty, Co-Founder & Executive Vice President, TeamLease Services Ltd.


Some HR experts are of the view that if gratuity can be paid without any conditions on the minimum years of service, then it can be included in the CTC. “Gratuity is not included in the CTC because it has a time bar. Therefore, we do not think it should be part of the CTC, although the attrition rate in our organisation – where gratuity is not a part of an employee’s CTC – is negligible. However, if an organisation is willing to pay gratuity without any conditions on the minimum years of service, it can be included in the CTC,” says Ranabir Chakraborty, General Manager (HR & Administration), Fortum India.

According to HR experts, gratuity is a ‘statutory benefit’ paid to the employees who have rendered continuous service for at least five years. It is a lump sum amount paid to an employee based on the duration of his/her total service. The benefit under gratuity is payable to an employee on cessation of employment (either by resignation, death, retirement or termination, etc.) by taking the last drawn salary as the basis for calculation.


“It is a very important form of social security and is in the form of a gratitude provided by the employer to the employees in monetary terms for the services rendered by them to the organisation. It is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. More so with the recent passing of the Gratuity Amendment Act in Parliament, the tax exemption limit has been enhanced to Rs 20 lakh from the earlier ceiling of Rs 10 lakh,” informs Pankaj Suri, Director of Human Resources, Edelman India.

While this renders huge benefits to employees, increase in gratuity limit may have a significant impact on the liabilities for the companies. The materiality of the impact would depend upon the demographic profile and actuarial assumptions used for assessing the liability.

Whatever be the case, employees must always take the benefit of gratuity and “they can enjoy this benefit only if they stay with any organization for a specified time. We welcome the government’s decision that paves way for doubling the limit of tax-free gratuity to Rs 20 lakh. This is a great move which will bring harmony among employees in the private and public sectors who are not covered under the Central Civil Services (Pension) Rules,’” says Lohit Bhatia, CEO, IKYA Human Capital Solutions, a division of Quess Corp.


Financial experts believe that gratuity has the twin advantage of helping employers retain employees for a longer period of time as well as forced savings while you work. The other important point to keep in mind is that it is enforced by law. So, “the argument that retirement benefits can be achieved by other means is actually meaningless because if gratuity is not enforced, then the employers are most certainly not going to pass on the savings to employees in some other form. While it may appear very easy, but the reality is that most savers are not able to keep aside enough money for their retirement. Hence, I firmly believe that gratuity and other forced retirement savings are very useful and should not be done away with,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.


Moreover, even remaining tax-free till Rs 20 lakh, gratuity can only be a small part of someone’s retirement corpus. Therefore, one should not completely rely on it and should invest in some other options also to accumulate a sufficient next egg.

“You can look at it as an assured amount, but you need to have additional investment plans that can help you build a corpus according to your goals and requirements,” says Adhil Shetty, CEO,

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