Govt Increases Gratuity Limit to ₹25 Lakh- Are You Eligible?

In a major decision, the Government of India hiked the maximum gratuity limit for central government employees to ₹25 lakh from the existing ₹20 lakh with effect from January 1, 2024. This, too, has been a housekeeping adjustment in conformity with the 50 percent DA milestone. ​

Understanding Gratuity Calculation

Gratuity is a lump sum benefit given to the employees on their retirement calculated on the basis of the last drawn salary (basic pay plus DA or admissible rate of DA) & of the length of service computed as under. The formula used is:​

Retirement Gratuity

Eligible for one-fourth of the emoluments for each completed 6 (six) months of qualifying service: limited to maximum emoluments of 16.5 times or rupees 25 lakh, whichever is less. ​

However, there should be at least five years continuous service for eligibility for retirement gratuity. Because of this, the gratuity amount actually varies according to an employee’s salary and the number of years he or she has been working. ​

Impact of the Gratuity Cap Increase

Increase in gratuity cap has huge monetary benefits for employees, especially those who fall in higher pay brackets and higher service periods. Income tax exemption for gratuity given to government employees is complete under Section 10(10)(i) of Income Tax Act. But short service period or lower salary employees can not receive more than ₹25 lakh. ​

Background and Recommendations

Earlier, the 7th Central Pay Commission had recommended fixing the ceiling of the gratuity at ₹20 lakh, instead of ₹10 lakhs, which will go up by 25 percent whenever DA crosses 50 percent. This most recent adjustment is a continuation of the government’s insistence for retirement benefits to be balanced with inflation and with the economic times. ​

Unified Pension Scheme (UPS) Considerations

With the announcement of the introduction of the Unified Pension Scheme (UPS) starting April 1, 2025, people have started asking how it would affect the law governing gratuity benefits.

The scheme is run by the UPS in order to offer a minimum assured pension and has features like those of the existing National Pension Scheme (NPS) and Old Pension Scheme. Within the framework of the UPS, gratuity shall continue to be paid in view of the Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021. ​

Tax Implications

However, gratuity received by the government employees is exempt from income tax under Section 10(10)(i) of Income Tax Act. This is why a higher gratuity amount up to ₹25 lakh is tax free to retirees. The relaxation of this exemption makes the gratuity benefit all the more attractive for those close to the ceiling limit. ​

Comparative Perspective with the Private Sector

On the other hand, this enhancement benefits central government employees, but it must be noted that private sector employees, too, continue to receive a ₹20 lakh gratuity ceiling.

This has created results prompting discussion on the necessity of uniformity in gratuity benefits from all sectors. For private sector employees and employers, similar improvement in their gratuity limits may be witnessed only when their regulatory changes are finalized in further direction. ​

Conclusion

With the decision to increase the gratuity limit from ₹10 lakh to ₹25 lakh, the gratuity benefits are made in sync with inflation and economic realities. Besides, this move goes a long way in strengthening the retirement benefits of retiring central government employees and underscores how periodic revision of retirement benefits is critical.

This is all to be encouraged, employees should understand how this may affect your retirement planning and to seek out your individual HR/Pension department to give you personalized information.