Gratuity provides a measurable financial incentive to workers, encouraging them to complete long-lasting service. But, some new taxation policies were enacted in India that brought very significant changes in so far as the tax treatments of gratuity were concerned for government employees and private-sectored persons alike.
Enhanced Gratuity Limits for Government Employees
Going forward, that is effective from 01 January 2024, the said limit, previously fixed at ₹20 lakh, has now been enhanced to ₹25 lakh in the maximum gratuity limit for central government employees. It has also been said to be in accordance with the hike that comes along with the increase in Dearness Allowance (DA) to 50% as mentioned in a circular issued by the Department of Pension & Pensioners Welfare on May 30, 2024. The higher ceiling will assure a better financial standing for retiring employees of the central government.
Tax Position for Employees in the Private Sector
Thus, as of now, the tax-exempt gratuity limit remains as ₹20 lakh for private sector employees under the Payment of Gratuity Act, 1972. Thereafter, any gratuity received exceeding this limit will be taxable as per the individual’s relevant income tax slab.
Changes Hoped in the Income Tax Bill 2025
The new Income Tax Bill for 2025 has put forward some provisions regarding gratuity taxation:
- Standard Deduction: Standard deduction of ₹50,000, or of whatever lesser amount is the salary amount, is proposed for salaried tax assesses.
- Exemption for Gratuities: Tax exemption on gratuities received as per the provisions of the Payment of Gratuity Act, 1972 by employees on account of retirement, incapacity, or death is proposed to be 100% taxable. The full amount is deductible for retirement gratuity for defense and death-cum-retirement gratuities as well. In the case of other employees, gratuity is proposed to be tax-exempt for a maximum of ₹75,000 or the actual portion, whichever is lower.
Things To Know as Employees
Here is what employees need to know: “Lifetime maximum exemption limit: Lifetime maximum exemption limit counts toward the limit of ₹20 lakh in tax exemption on gratuity. Gratuity received from two or more employers would be added to this limit.”-cite- turn0search5- .
- Tax Treatment of Excess Amounts: Beyond the exemption limit, the resultant gratuity will be taxable according to the slab rates of income tax applicable to the individual.
Conclusion
The latest grants in taxation on gratuity change are aimed at improving retirement benefits and simplifications of the tax structure. Government employees have the benefit of a rising ceiling on gratuity while private sector employees are still shackled under the old limits. The new Income Tax Bill 2025 seeks further facilitation of gratuity taxation, hence the need for continuous awareness amongst employees to improve their financial planning.
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