Tax Free Gratuity limit is set to Rs 20 Lakh

Tax-free gratuity withdrawal limit to be Rs 20 lakh

The tax exemption limit on gratuity is set to increase to Rs20 lakh

Recently, the Ministry of Labour and representative of state governments, employees and employers agreed to increase the gratuity withdrawal limit to Rs20 lakh from the current ceiling of Rs10 lakh. The tax exemption limit on gratuity is also set to increase to Rs20 lakh. Mint had earlier reported that a labour ministry spokesperson had said on 23 February that all the stakeholders-states, Centre, trade unions and industry representatives-were in agreement over enhancing the gratuity ceiling from Rs10 lakh to Rs20 lakh. Once this gets implemented, employees will have access to a larger amount of tax-free gratuity.

Here is how the math works

Who gets Gratuity
Gratuity is part of an employee's salary but it is not paid every month. It is paid to the employee either at the time when she leaves the job or at the time of retirement; provided she has completed at least 5 years of employment with the employer. In case of death of the employee, the amount is paid to the employee's family, irrespective of the employment period. Under Payment of Gratuity Act, 1972, any establishment (factory, mine, oilfield, plantation, port and railway company, or shop) having more than 10 employees at any point of time in the last 12 months, is required to provide gratuity to its employees.

Tax Liability
Under the income-tax Act, gratuity is taxed under the head 'income from salaries'. The portion of salary received as gratuity can be exempt from tax under section 10(10) of the Income-tax Act, 1961, depending on various factors. But if gratuity is received by an employee of central, state or a local government agency, it is fully exempt when withdrawn on death or retirement.

Under the current regime, where the Payment of Gratuity Act is applicable, the least of the following received by the employee is exempt from tax:

-Rs 10 lakh,

-actual gratuity received,

-15 days' salary, based on the salary last drawn multiplied by the number of years in employment.

To calculate 15 days' salary, the last drawn salary is divided by 26 and the number is multiplied by 15. Here, salary includes basic salary and dearness allowance, if any.

Let us take the case of an employee who has worked for 25 years with an employer and her last-drawn salary was Rs1 lakh per month. Let us assume her total accumulated gratuity amount was Rs15 lakh. In this case, she can claim Rs10 lakh as tax-free gratuity.

This would be so because Rs10 lakh (maximum allowed) is the least of the other two options: Rs15 lakh (gratuity receivable) and Rs14,42,307. The latter figure is arrived at by the following computation: (((1,00,000/26)*15)*25).

The remaining Rs5 lakh (Rs15 lakh minus Rs10 lakh) can be given by employer as ex gratia or performance bonus; this would be taxable.

However, after the limit is extended to Rs20 lakh, the least amount for this employee would no longer be Rs10 lakh, it would be Rs14.42 lakh, and instead of paying tax on Rs5 lakh, she would have to pay tax on Rs58,000 (Rs14.42 lakh minus her total gratuity entitlement).

Under the current rules, in cases where employers are not covered under the Payment of Gratuity Act, then the minimum of the three-Rs10 lakh, actual gratuity received or half month's salary for each completed year of service-is exempt from tax. Salary is taken as the average salary of 10 months immediately before the month in which the person retires. This may change once the Act is amended.

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SUKANYA SAMRIDDHI YOJANA

 

As a part of Beti Bachao Beti Padhao campaign Introduced by Prime Minister Narendra Modi, Sukanya Samriddhi Yojana helps you to create wealth for your daughter, for their education and marriage expenses.

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• You get fixed interest rate of 9.1% along with tax benefits.
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• Minimum investment needed is Rs.1000

• Eligibility:Parents or the legal guardians of a girl child, who is upto 10 years of age, can open the account in the girl's name. Up to December 1st 2015, if the girl child was born on or after December 2, 2003, a grace period of 1 year was given for the account to be opened.
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How to reduce your Home Loan Interest Rates

Your home loan Online





For existing home loan borrowers, there are options available to reduce the high interest burden.

Lenders are aggressively reducing interest rates on new home loans.

But what if you are an existing borrower? Those who have taken home loans before April 2016 are still paying a higher interest as their loans are either base rate-linked or benchmark retail prime lending rate (BRPLR)-linked. The options before you are as follows.

If bank is the lender

One-time switch to MCLR: You can switch from a base rate to MCLR or marginal cost-offunds based lending rate. The latter is more dynamic as it is directly linked to repo rate and allows you to enjoy the change in interest rates faster. In the current cycle of lower interest rates, it makes sense to shift to MCLR as a downward change in repo rate will lead to lower MCLR. However, the opposite also holds true. In case of an upward surge in rates, the increase will be passed on to borrowers faster

There is also a cost involved. Banks charge a conversion fee of around 0.5% on your outstanding loan amount, plus taxes. For instance, if your home loan outstanding is `20 lakh, the conversion fee would be around `10,000, plus taxes. Most importantly, switching to MCLR is a one-time option, you cannot revert to base rate again. And once you choose an MCLR rate, you cannot reset it for the next one year.

If loan is with NBFCs

Reset to a lower rate: The MCLR system doesn't apply to housing finance companies (HFCs) and non-banking financial companies (NBFCs). So, if you have taken a loan from either, you can reset your interest rate by paying a conversion fee.

HFCs and NBFCs usually do not change the base or BPLR rate, they change the spread, which results in an overall reduced rate (actual interest rate = base rate +spread). For instance, a lender with a base rate of 16% and a spread of -6%, will allow you to change your spread to say -7%. This would result in a reduced rate of 9% [16% + (-7%)] than the earlier 10% [16% + (-6%)]. The conversion fee will vary from lender to lender. Also, unlike with banks, you can reset your interest rate any number of times.

Once you opt for a reduced interest rate either with banks or NBFCs, you have the option of maintaining the same EMI or lower the loan tenure and vice versa. In case you choose the option to lower the EMI, you would be required to provide new ECS mandatepost-dated cheques.

Cost-benefit analysis

Before taking the plunge, calculate the total cost you are incurring to reduce your interest rate, and the savings you are making in the process. If the fees are higher than the savings, it doesn't make sense to switch or reset. Account for the total cost--conversion fee plus taxes. Look for at least 25 bps difference in interest rates.

Also, consider the remaining tenure of your loan. When the balance tenure is only a few years, it is not advisable to switchreset as the bulk of the interest component would have been paid and EMI would constitute mainly the principal

Next, check on the spread being offered by the lender. "Lenders can't lend below MCLR or base rate, but if you have a good credit history and track record, you can negotiate on the spread

You also need to look at the charges. They vary from lender to lender and can be negotiated.

Refinance options

If the deal with your existing lender isn't lucrative, you could consider refinance or balance transfer option. However, it is a lengthy process. It is like getting your loan approved all over again. Refinancing can be costly too.Various fees of the new lender can be up to 50 bps of the loan amount and then there is the mortgage fee plus taxes. If the processing and transaction fee is less than the savings on the interest rate difference (between existing and the new lender) for one year, it makes for a case to switch to a new lender. If there is a minimum difference of 75 bps between the interest rate offered by a new lender compared to existing lender, refinancing makes sense. That too only for loans with residual tenure of more than 7-10 years

So the choice between refinancing, switching or resetting a loan rate depends on the outstanding amount and tenure, the difference in rates and the amount of time you have to get the job done. As interest rates may not remain low for ever, make the most of current low rates.