19 Oct 2022
Gratuity Taxability and Exemption under Income Tax Act 1961
What is Gratuity
Gratuity is the Perquisite of payment given by an employer to an employee in appreciation of the past services rendered by the employee which is received at the time of retirement or in the event of death. The maximum gratuity Tax exemption that an employee can avail is Rs. 20,00,000.
Basics of the Gratuity
Gratuity is the Monetary benefit paid by the employer to the Employee but instead of paid on a monthly basis it is paid in aggregate at the end.
The provision of the gratuity is governed by the Payment of the Gratuity Act 1972 and sme id paid at the happening of the mentioned Event below-
Ø On Retirement or Resignation
Ø On Death or Disablement due to Accident at the workplace
Ø On Superannuation
Note-1: a) Superannuation means that person attain the age of 60 years of the age that mentioned in the superannuation
b) For the purpose of being eligible for the gratuity employee need to complete the Continuous service period of the 5 years atleast However in case of the death or disablement the same shall not be applicable.
c) Continuous service means uninterrupted service and includes service which is interrupted by sickness, accident, leave, layoff, strike or a lock-out or cessation of work not due to any fault of the employee concerned, whether such interrupted or interrupted service was rendered before or after the commencement of this Act.
- In the case of an employee who is not in uninterrupted service for one year, he shall be deemed to be in continuous service if he has been actually employed by an employer during the twelve months immediately preceding the year for not less than-
(i) 190 days, if employed below the ground in a mine, or
(ii) 240 days, in any other case, except when he is employed in a seasonal establishment.
Ø An employee of a seasonal establishment shall be deemed to be in continuous service if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during the year..
Note-2 In case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is minor, the share of such minor, shall be deposited with the Controlling Authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority
Exemption of Gratuity under Income Tax Act
As per the Income Tax Act 1961 provisions mentioned under the section 10(10)
(i) Any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defense or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defense services.
(ii) Any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act.
(iii) Any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependents on his death, to the extent it does not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit70 as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government :
Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this clause shall not exceed the limit so specified:
Further provided that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assesse of such previous year or years, the amount exempt from income-tax under this clause shall not exceed the limit so specified as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.
Types of Employee
Ø Full Time Employee
Ø Part-Time Employee
Ø Seasonal Employee
Ø Temporary Employee
Employees Eligible for the Payment of the Gratuity
Every individual – working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months – is entitled to gratuity.
Once the Act becomes applicable to an employer, even if the number of employees goes below 10, Gratuity is still Applicable.
Application for gratuity:-
(1) An employee who is eligible for payment of gratuity under the Act, or any person authorized in writing, to act on his behalf, shall apply, ordinarily within thirty days from the date the gratuity became payable, in Form ‘I’ to the employer: Provided that where the date of superannuation or retirement of an employee is known, the employee may apply, to the employer before thirty days of the date of superannuation or retirement .
Calculation of Gratuity
Gratuity is calculated on the basis of the Last drawn salary for the 15 days withdrawn by the Employee for all the continuous period the service of his work tenure.
(15 * Your last drawn salary * the working tenure) / 30
Suppose Mr. Rahul’s Last withdrawn salary is Rs.2,00,000 per month (Basic + DA) and he serves the organization for the period of 10 years and 7 months.
He is entitled for the gratuity amount of Rs. 12,69,230
Points to note:
Ø Gratuity that paid to Government Employees are fully Exempt
Ø 15 days salary based on the salary last drawn for every completed year of service or part thereof i.e. 15/26.
Ø Number of years in service is rounded off to the nearest full year.
Employees not Eligible for the Payment of the Gratuity