The centre on Tuesday approved an amendment Bill that increases the limit of tax-free gratuity up to Rs 20 lakh for employees belonging to the public as well as private sector.

“The Union Cabinet chaired by Prime Minister Narendra Modi has given its approval to the introduction of the Payment of Gratuity (Amendment) Bill, 2017, in Parliament,” the government statement said.

Once this Bill is passed, all employees that are not covered under Central Civil Services (Pension) Rules —whether from the private sector, public sector or any autonomous organisation under the central government — would be able to avail the tax-free gratuity of up to Rs 20 lakh. This limit would be on par with all Central employees.

The current upper ceiling on gratuity under the Payment of Gratuity Act, 1972, is Rs 10 lakh. Therefore, the tax-free ceiling for central employees under Central Civil Services (Pension) Rules, 1972, with regard to gratuity was Rs 10 lakh only. However, with the roll out of 7th Central Pay Commission, this ceiling was raised to Rs 20 lakh for Central employees from January 1, 2016.

“Therefore, considering the inflation and wage increase even in case of employees engaged in the private sector, the government is of the view that the entitlement of gratuity should be revised for employees who are covered under the Payment of Gratuity Act, 1972.

Accordingly, the government initiated the process for an amendment to Payment of Gratuity Act, 1972,” the statement added.

The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons. The main purpose for enacting this Act is to provide social security to workmen after retirement, whether retirement is a result of the rules of superannuation or physical disablement of vital part of the body.

“The Centre’s move to amend and increase the gratuity ceiling resulting in the statutory cap being doubled, is a welcome step from an employee’s perspective. However, the industry would be impacted if this proposal becomes a law, considering the higher amount of gratuity now payable to an eligible employee pursuant to his exit from employment or retirement. Earlier, employers could limit their liability to the statutory cap of Rs 10 lakh even if the calculation of gratuity for an eligible employee resulted in a higher figure,” said Anshul Prakash, Partner, Khaitan & Co.