It means a majority of the workforce isn’t covered under the benefit programmes applicable to this sector.

While the situation may change over time, those already working in the organised sector are likely to benefit soon.

The government seems serious about offering more social security to the organised-sector workforce. Recently, it tabled the Payment of Gratuity (Amendment) Bill, 2017 in the Parliament. The Bill endeavours to amend the Payment of Gratuity Act, 1972.

Who’s covered under the Act?

Establishments employing at least 10 persons are covered. An employee is entitled to receive 15 days’ pay for the each completed year of service.

However, the precondition is that the employee has to complete a minimum of five years continuous service to be eligible to receive gratuity benefits. 

Tax treatment for gratuity payments

As per the existing rules, the minimum of the following is exempt:

• Rs 10 lakh; or
• Actual gratuity received; or
• Gratuity an employee is entitled to receive—based on the formula— as per the provisions of Act.
  
  The formula is (15/26) X last drawn salary X number of completed years.

Note: Salary means basic plus dearness allowance

An employee has to work at least six months in the last year of service to receive the gratuity benefits for the full year. For example, if a person has worked 16 years and eight months, he/she would be entitled to receive a gratuity for 17 years. On the contrary, if he/she worked for 16 years and four months, then he/she shall receive gratuity only for 16 years.

In recent times, the government hiked the limit to Rs 20 lakh for the Central Government employees as suggested by the 7th Pay Commission report. To get the private sector employees on par with them, now it wants to amend the Payment of Gratuity Act.

What are the proposed changes?

The proposed amendments will enable the government to replace "ten lakh rupees" with the words "such amount as may be notified by the Central Government from time to time".

Further clarification:

 If passed, this would be a crucial amendment, since it won’t define the “maximum amount” in the Act itself. This will give the government flexibility to increase the limits at a regular frequency to factor in the inflation and wage increases. In the future, it will not have to amend the Act, however, it can introduce changes by a notification in the Official Gazette.

The Bill aims to amend the provisions on maternity leave to calculate “continuous service” considered for the gratuity payment towards a female employee. The Central Government aims to notify the period of maternity leave in case of the female employee as deemed to be in continuous service in place of “existing twelve weeks.”

For now, the Government wants to enhance the paid maternity benefits to 26 weeks from the existing 12 weeks through the Maternity Benefit (Amendment) Act, 2017. In other words, absence on account of maternity leave upto 26 weeks would be ignored for the calculation of “continuous service”. 

If the government succeeds in passing the Bill, formal sector employees will have something to cheer for. However, it has missed the opportunity to introduce radical changes—perhaps fearing the backlash.

There was a demand to completely do away with the provision of “five years of continuous service”. Since many companies also include probable gratuity payment in the calculation of Cost-To-Company; any instance of an employee leaving the company before the completion of five years results in a straight loss to him/her.

Similarly, the government could have also taken this opportunity to review the definition of salary—i.e. basic plus dearness allowance. Nowadays, many private sector companies keep these components low and the proportion of other allowances higher to save on taxes. It should have tried to plug this loophole.

Nonetheless, the proposed amendments will offer greater flexibility to make further amendments in the future.

Retirement planning is an important exercise, and even if you are an employee in the organised sector, do not solely rely on the various benefits such as Employees’ Provident Fund (EPF) or gratuity. Instead, calculate the amount you can comfortably retire with. And invest regularly to grow your investments to the desired level.

If you invest in mutual fund schemes  keeping in mind your investment objective and the risk appetite they can help you grow your wealth.

Investors looking for readymade solutions, here’s PersonalFN’s FundSelect Plus, a comprehensive portfolio service to benefit from SEVEN time-tested, readymade equity and debt mutual fund portfolios. Based on your risk profile and investment horizon, you can choose from three equity portfolios and three debt portfolios. In addition, you get a readymade tax-saving portfolio as well. This service has a decade-long market-beating track record. Don’t miss out on exclusive discounts available, subscribe now! 
 

Add Comments

Comments
arachni_text Jan 06, 2019 arachni_text
arachni_text) Jan 06, 2019 arachni_text
arachni_text Jan 06, 2019 arachni_text
arachni_text Jan 06, 2019 arachni_text
arachni_text Jan 06, 2019 arachni_text

 1 2 3