Parliament passed the Payment of Gratuity Bill, 2018.

Context:

• The Parliament recently passed the Payment of Gratuity Bill, 2018 that will empower the government to fix the amount of tax-free gratuity and the period of maternity leave with an executive order.

Background:

• 21^st August 1972: The Payment of Gratuity Act was passed by Indian Parliament in 21 August 1972 and came in force on 16 September 1972.
• 22^nd March, 2018: The Parliament on 22^nd March, 2018 passed the amended Payment of Gratuity Bill, 2018.
• The Bill was passed unanimously in the House without discussion or arguments as all parties had agreed on the importance of the passage of the Bill.

What are the key amendments in the Payment of Gratuity Act, 1972 presented in the Payment of Gratuity Bill, 2018?  (Important for prelims)

The key amendments in the Payment of Gratuity Act, 1972 presented in the Payment of Gratuity Bill, 2018 are as follows:

• The Payment of Gratuity (Amendment) Bill, 2018 ensures harmony amongst employees in the private sector and Public Sector Undertakings/Autonomous Organizations under Government who are not covered under CCS (Pension) Rules.
• These employees will be entitled to receive higher amount of gratuity at par with their counterparts in Government sector.   
• The Bill seeks to make formal sector workers eligible for tax free Rs 20 lakh gratuity in line with the implementation of the 7th Central Pay Commission.
• Earlier the formal sector workers were eligible for Rs 10 lakh tax free gratuity after leaving job or at time of superannuation.
• After the Amendment bill comes to force, the government may raise the limit of Rs. 20 lakh further to increase the cap in gratuity amount as and when the need arises without having to change the law.
• The Bill also envisage to amend the provisions relating to calculation of continuous service for the purpose of gratuity in case of female employees who are on maternity leave from ‘twelve weeks’ to such period as may be notified by the Central Government from time to time.

What is the Payment of Gratuity Act, 1972?

• The Payment of Gratuity Act was passed by Indian Parliament in 21 August 1972.
• The act came in force on 16^th September 1972.
• Under Section 4, payment of gratuity is mandatory. (Important for prelims)
• The general principal underlying gratuity scheme is that by service over a long period the employee is entitled to claim a certain amount as retirement benefit. 

Application of the Act: (Important for prelims)

• The Payment of Gratuity Act, 1972 is applicable to the following:
• whole of India but according to section 1(2), in so far it relates to plantation or ports, it shall not be extended to State of Jammu and Kashmir;
• every factory, mine, oilfield, plantation, port and railway company;
• every shop or establishment within the meaning of any law in which ten or more persons are employed, or were employed, on any day of the preceding twelve months; and
• such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.

Payability:

• Gratuity shall be payable to an employee on termination of employment after he has rendered continuous service for not less than 5 years. (Important for prelims)
• The termination can be due to :
• Retirement or Resignation.
• On Death or Disablement due to accident or disease.
• As per Section 4(1), the completion of continuous service of 5 years is not required where termination of employment is due to death or disablement. In such case mandatory gratuity is payable.

What are the major pension schemes taken by the government of India?

The major pension schemes taken by the government of India are as follows:

Public Provident Fund (1968)

• Public Provident Fundmobilizes small savings by offering an investment with reasonable returns combined with income tax benefits.

National Pension Scheme (2004)

• National Pension Scheme is a voluntary pension scheme that is regulated by the Pension Fund Regulatory & Development Authority (FRDA) and introduced with an aim to provide for retirement needs.

Pradhan Mantri Jan Dhan Yojana (2014)

• Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.

Pradhan Mantri Jeevan Jyoti Bima & Surakhsha Bima Yojana (2015)

• Pradhan Mantri Jeevan Jyoti Bima Yojana is a government-backed Life insurance scheme in India.

Atal Pension Yojana (2015)

• Atal Pension Yojana (APY), a pension scheme for unorganised sector workers such as personal maids, drivers, gardeners etc.

Pradhan Mantri Vaya Vandana Yojana (2017)

• Pradhan Mantri Vaya Vandana Yojana is a pension scheme for senior citizens above 60 years of age which gives a guaranteed annual return of 8% over policy tenure of 10 years.

What are the major drawbacks in implementing public pension schemes?

The major drawbacks in implementing public pension schemes are as follows:

Restriction on Withdrawal:

• One of the major drawbacks considered by many is the restriction imposed on withdrawal of contribution.
• Only a mere percentage of the total investment may be withdrawn at any point after completion of subscription which discourages many to invest in the scheme.

Portion of Withdrawal and Annuity Payout Taxable:

• Although in some schemes, 40% of the withdrawal is exempted from tax, but rest of the amount is taxable as per the Income Tax Act.

Low Returns on Annuity Plans:

• Quite often, the Annuity plans offer very poor returns on investment and are not at all tax efficient.
• Thus, one ends up with poor returns on the vested amount.

Better Alternatives Available:

• Private pension schemes offer better Retirement plans as compared to public pension schemes which promise better returns, tax eficiency and lexibility making the former a lucrative alternative for investment.

Return on Investment Not Guaranteed:

• The investment in some government scheme like national pension Scheme does not guarantee any minimum or fixed return as it is subject to fund performance over a period of time.

Conclusion:

• Ensuring sufficient retirement savings for workers through initiatives such as Payment of Gratuity Act is important for policymakers as the elderly population has been growing at twice the pace as the general population in the last decade.

Related and important terminology:

Gratuity:

• Gratuity is a defined benefit plan given by the employer to the employee for rendering services continuously for five years or more.
• It is a monetary benefit usually given at the time of retirement.
• But there are certain rules that make an employee eligible to receive gratuity before the age of retirement or superannuation.

Pay Commission:

• The Pay Commissionis set up by Government of India, and gives its recommendations regarding changes in salary structure of its employees.
• The first pay commission was established on January, 1946 and it submitted its report in May, 1947 to the interim government of India.
• Since India’s Independence, seven pay commissions have been set up on a regular basis to review and make recommendations on the work and pay structure of all civil and military divisions of the Government of India.