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The Union Cabinet on Tuesday approved the introduction of the Payment of Gratuity (Amendment) Bill that seeks to double tax-free gratuity for formal sector employees to Rs 20 lakh, which currently stood at Rs 10 lakh.

With the amendment of the bill, the maximum limit of gratuity of employees of the private sector, public undertakings and autonomous organisations under the government who are not covered under Central Civil Services (Pension) Rules, are now at par with the central government employees, which is Rs 20 lakh, the Economic Times reported.

"This move will greatly benefit the middle management and senior management employees. With the ceiling on payment of Gratuity being raised, they will receive a higher amount of gratuity as tax-free compensation. The only thing that one will have to watch out for is whether companies that include gratuity in CTC will restructure salaries or not," Financial Express quoted Kuldip Kumar, Partner and Leader for Personal Tax at PwC, as saying.

With the implementation of the 7th Central Pay Commission, the gratuity ceiling for government servants was revised from Rs 10 lakh to Rs 20 lakh with effect from January 1, 2016.

Considering inflation and increase in wage even in the case of employees engaged in the private sector, the government decided to revise the entitlement of for employees who are covered under the Payment of Gratuity Act, 1972.

The primary aim is provide social security to the employees post retirement. The Act serves as a key social security legislation to wage earners in industries, factories and establishments.

Gratuity is a sum of money which forms part of employees' salary. It is paid by the employer to their employee on rendering services for not less than five years in the same company.

The amount is exempt from taxation under the I-T Act for state government employees, central government employees or any local authority receiving the amount under the Act of 1972.

However, two pertinent questions that arise here are, will everyone be benefitted with this move and how many years an employee should work to be eligible to avail maximum gratuity ceiling limit?

"A person retiring with an annual salary (wages as per Payment of Gratuity Act, 1972) of Rs 10 lakh should have worked for approximately 41 years in order to reach the revised maximum gratuity ceiling limit of Rs 20 lakh, whereas a person with an annual salary (wages as per POGA) of Rs 20 lakh at the time of retirement would achieve the maximum gratuity limit of Rs 20 lakh in approximately 20 years of service," Amarpal S. Chadha, Tax Partner and India Mobility Leader, EY, explains to FE.