Employee Gratuitous Severance Limit Doubled

Gratuity, a reward for long service at a company, is considered one of the important social security benefits payable by Indian employers. Recently, the gratuity limit for employees has been doubled from the previous limit of INR 1 million (US $14,000 : GBP 11,000 : Euro 12,000) to INR 2 million (USD $28,000 : GBP 22,000 : Euro 24,000).

The Payment of Gratuity Act, 1972 provides for payment of gratuity upon employment termination, if the employee has been employed for at least five 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.

Pursuant to the Payment of Gratuity (Amendment) Act, 2018 which recently went into effect, 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 (from INR 1 million) and (b) the period of maternity leave (for the purpose of computation of “continuous service” under the Gratuity Act) as 26 weeks (from 12 weeks).

Comment

The gratuity limit, which was INR 350,000 in 1997, was increased to INR 1 million in 2010 after more than a decade long wait. 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 altogether. The current amendment enables the government to occasionally revise the gratuity limit without going through the procedural and time-consuming hassles of amending legislation. This would enable the government to revise the limit in the future more quickly.

While this is a welcome change for employees, increased gratuity limits may also help employers from an employee retention perspective, given that the amount of gratuity payable increases with every year of an employee’s service. Some progressive companies (which would not be affected by the new gratuity limit) pay out the entire gratuity based on the formula without any monetary cap. Employers generally may want to rework their financials (and gratuity policies) to account for a significantly increased liability.

Written by Ajay Singh Solanki of Nishith Desai Associates and Roger James of Ogletree Deakins