The industry and trade unions have supported the government proposal to raise the tax exemption limit for gratuity funds to Rs 10 lakh from the present Rs 3.5 lakh for both government and private sector employees.

The Federation for Indian Chambers of Commerce and Industry (Ficci), for instance, wants it to be implemented as early as possible.

The increase in tax exemption limit translates into increase in entitlement of the employee in most cases, a Ficci spokesperson said. Many employees who were eligible for more than Rs 3.5 lakh were not getting it so far. This will change with the change in the ceiling, Ficci said.

In a communication to trade unions and employers in October, the Union labour ministry had asked for views on whether the ceiling should be raised to Rs 10 lakh. Three weeks time was given to the stakeholders for submitting their responses.

An Assocham official said the organisation had written to its members that it was in favour of the increase. The companies had responded positively to it, the trade body said.

Labour Secretary Sudha Pillai said that the ministry was yet to take a view on the matter. We will take a stand depending on the response of the employees and employers groups, she said.

The ministrys move follows the Sixth Pay Commission recommendation to extend the limit for central government employees. Officials said the ministry seeks to bring parity between the government and private sector employees.

Trade unions have already sent their assent to the proposal. Hind Mazdoor Sabha national secretary R A Mittal said: We got the letter from the ministry in October and we replied promptly that we are in favour of it.

Why would trade unions oppose it, he asked.

CITU national secretary W R Varadarajan said that the union had always been demanding raising of the exemption ceiling. We have supported the move, he said.

The Payment of Gratuity Act, 1972, applies to factories and other establishments employing 10 or more persons. On completion of five years service, the employees are entitled to payment of gratuity at the rate of 15-day wages for every completed year of service or part of it in excess of six months subject to a maximum of Rs 3.5 lakh, the law says. However, the gratuity is considered an income and the employee who receives it is liable to pay taxes on it. However, gratuity up to Rs 3.5 lakh is exempt from tax under the provisions of Section 10(10) of the Income Tax Act, 1961.

Employers also enjoy tax exemption under the Income Tax Act on any sum paid by way of contribution towards an approved gratuity fund. Till now the payment could not exceed Rs 3.5 lakh.

Ficci said this move would not benefit the employers by way of a source of parking more funds in a tax exempt source. It has to be paid to the employee. Even if the employee leaves without completing five years, the use of the money has to be accounted for, said an official.

Though under the Gratuity Act, gratuity funds were supposed to be set up by companies, not all have done it and gratuity is paid out of the general account. Therefore, there is no tax exemption unless the sum is shown as having been paid as gratuity, he said.