GRATUITY AND ITS TAXATION

Gratuity is a lump sum payment made by the employer as a mark of recognition of the service rendered by the employee when he retires or leaves service.

As per Gratuity Act, 1972: Gratuity shall be payable to an employee on termination of his employment after he has rendered continuous service for not less than five years .--

1.       on his super annuation or

2.      on his retirement or resignation or

3.      on his death or disablement due to accident or disease (No need for five years continuous services)

INCOME TAX LIABILITY ON GRATUITY

Under Income Tax Act, 1961, the tax treatment of gratuity is covered under Section 10(10).

For calculating Tax Effect the Employees are divided into three categories:

1.      Government Employees

2.      Employees covered under Gratuity Act, 1972

3.      Any Other Employees

Government Employees

Gratuity received by Employees of Central Government, State Government and Local Authority are wholly exempt from Tax.

Employees covered under Gratuity Act, 1972

·         Gratuity received by Employees of Organisation Covered under Gratuity Act, 1972 is exempt from Tax upto minimum of Following Three amounts: ·         15 days Salary (based on Salary last drawn)  or 7 days Salary for Seasonal Employees for each completed year of service or part thereof in excess of 6 months ·         Rs. 10,00,000.00 ·         Actual Gratuity Received ·         Above exemption is applicable only if continuous service of 5 years is provided by employee (Not applicable in case of death or disablement) ·         Salary means Basic + Dearness Allowance but does not includes Bonus. Commission or any Other Allowances ·         For the above purpose month is taken of 26 days.

Any Other Employees

·      Gratuity received by Employees of any Other organisation is exempt from Tax up to minimum of Following Three amounts: ·         Half months salary (based on average salary of 10 months immediately preceding retiring month) for each completed years of service. ·         Rs. 10,00,000.00 ·         Actual Gratuity Received ·         Salary for this purpose means Basic + Dearness Allowances +Commission on Fixed Percentage of Turnover but does not includes Bonus. Commission or any Other Allowances

RELEVANT PROVISIONS OF INCOME TAX ACT, 1961

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 defence 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 defence 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 dependants 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 limit 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] :

Provided further 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 assessee 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.



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