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With the government raising the gratuity limit, it makes sense to negotiate for a higher basic salary to guarantee a better payout.

The Union cabinet’s selection to raise the tax-free gratuity limit from Rs 3.five lakh to Rs ten lakh is likely to turn out to be a tool for companies to retain employees.

In 2008, when the government implemented the Sixth Pay Commission for central government employees, it was with impact from 2006. This helped employeesreap rich benefits. The selection to enhance the limit forprivate sector employees brings them at par with government employees in terms of gratuity benefits.

Nonetheless, employees wanting to take advantage of this selection need to be mindful of a few issues. A single, salary negotiations will turn out to be important as it makes sense to ask for a higher basic salary, specially if he is preparing to remain with the company for long. Also, job-hoppers stand to shed income which is deducted from their salary under the gratuity head.

“To have a expense-optimum structure, the basic salary really should be 40-50 per cent of the pay,” says Vikas Vasal, executive director, KPMG. This guarantees that a particular person strikes a balance among the taxes he has to pay, his take-residence salary, and exemptions and deductions accessible below the Income-Tax Act.

Even though negotiating for a new job, it is very best if you ask for a higher basic pay. This will support you accumulate a good gratuity, or “accrued benefit,” as it is known as. “Following this announcement, employees should be a lot more concerned with the basic salary than the expense to company, especially the middle class, for whom Rs ten lakh is a important sum,” said K Pandia Rajan, managing director, Ma Foi Randstad, citing the example of the US, where the basic salary is 70 per cent of the total.

In India, several employers keep the basic pay low, say tax authorities. In such situations, employees should take a re-look at their basic salaries. If the basic salary as a percentage of the overall salary is low, the particular person really should ask the employer to bring it to the 40-50 per cent degree. “In tiny organisations, there is a scope for such negotiations,” said a tax professional. Knowing the approach of gratuity calculation will clarify this point. The calculation is based on the current basic salary multiplied by the number of years, and additional multiplied by 15/26.

If an employee with a basic monthly salary of Rs 20,000 has resigned right after completing 5 years of service, he will get Rs 57,692 as gratuity. For a person who is retiring soon after 30 years and has a basic salary of Rs 60,000, the gratuity will be Rs 10,38,461. Of this, the individual does not need to pay tax on Rs ten lakh. The remaining Rs 38,461 will attract tax. The taxpayer desires to add the excess amount to his income to calculate his tax liability.

In long term, an employee will be ready to save tax on gratuity if he invests the quantity in an annuity strategy. “The draft of the Direct Tax Code has made a provision for such an investment,” stated Vasal. In the Spending budget speech, the finance minister said the government was most likely to implement the Direct Tax Code from April one, 2011.

Any organisation with far more than 10 employees needs to make provision for gratuity payouts according to the Payment of Gratuity Act, 1972. An employer makes this payment at the time of retirement, resignation, and death or disablement due to an accident or a illness.

In the private sector, only manufacturing companies have low employee churn. In other sectors, attrition rates are fairly high.

A lot of feel that employees in the private sector do not give value to gratuity as they rarely operate in a business for lengthy. “Young employees today look at cash-in-hand a lot more than extended-term benefits like gratuity,” said a human resource head of a large organization.

To be eligible for gratuity, an employee requirements to place in a substantial quantity of years in the job. Even though the Payment of Gratuity Act, 1972, pegs this at 5 years, many companies have set higher limits.

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