Gratuity refers to the emoluments received by an employee from his employer in gratitude for the services rendered. Such sum can be paid on retirement, resignation, superannuation, death or disablement. Under the Gratuity Act, the sum can be paid only after an employee has rendered continuous service of not less than five years. Exceptions being termination of employment on account of death/disablement.

Eligibility criteria:-Gratuity shall be payable to an “employee” on the termination of his employment after he has rendered continuous service for not less than five years.

· On his superannuation.

· On his retirement or resignation.

· On his death or disablement due to accident or disease.

Note: However, the condition of five years of continuous service is not necessary if service is terminated due to death or disablement.

To whom is Gratuity Payable?

Gratuity is normally payable to the employee himself, however in the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs. In case the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Taxability of Gratuity

 (i)  Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.

(ii)  Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-

(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned      employee.

(b) The amount of gratuity as calculated above shall not exceed Rs 10 Lakh.

(iii) In case of any other employee, gratuity received shall be exempt subject to the following    limits:-

(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service

(b) Rs. 10 Lakhs whichever is less. Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1).

Formula :- Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary x 15/26 x No. of years of service

Your last drawn salary will comprise your basic + DA. For computation of gratuity, your service period will be rounded off to the nearest full year.

Example :

 Suppose, Mr A retires from a software company after servicing for 35 years and at the time of retirement his basic salary was Rs 50,000 per month.

Upon retirement, Mr A is eligible for a gratuity payout of Rs 10,00,000 and is covered under the Gratuity Act.

This example indicates that by increasing the limit, Mr A will be getting more gratuity and also a significant tax benefit.

Taxable amount of gratuity in different scenarios

Taxable Gratuity – Pre Amendment

Taxable Gratuity – Post Amendment

Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 3,50,000

Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days Salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 10,00,000

Exempt Gratuity = Rs 3,50,000

Exempt Gratuity = Rs 10,00,000

Taxable Gratuity = Rs 10,00,000- 3,50,000 = Rs 6,50,000

Taxable Gratuity = Rs 10,00,000- 10,00,000 = NIL

 

Before making any decisions do consult the experts. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

 

Abhishek Ranjan Singh

+91 9022838615

Managing Director and Founder of ARS Solutions

Certified and Authorized Tax Return Preparer of Income Tax Department, India 

Registered Mutual Fund Advisor of Association of Mutual Funds in India

Registered Return Preparer of Election Commission of India

Also read related article: How to Pay Zero Tax for Income up to Rs 10 Lakhs by CA Chirag Chauhan

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Abhishek Ranjan Singh

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Managing Director and Founder, ARS Solutions



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