GRATUITY- Its Income Tax Treatment

Gratuity is Taxable on the following basis:-

1. In the Case of a Government Employee- u/s 10(10)(i)

Any death-cum-retirement gratuity received by an employee of the Central Government, State Government or local authority is wholly exempt from tax.

2. In the case of an employee covered by the Payment of Gratuity Act –u/s 10(10)(ii)

Any Gratuity received by an employee covered by the Payment of Gratuity Act, 1972 is exempt from tax to the extent of –

• 15 days’ salary (7 days in the case of employees of seasonal establishment) based on the salary last drawn for every completed year of service or part thereof in excess of 6 months, or
• Rs.3,50,000/-, or
• Gratuity actually received, whichever is less.

3. In case of any other employee-u/s 10(10)(iii)

In case of any other employee, gratuity received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior to retirement, is exempt from tax to the extent of the least of –

• Rs.3,50,000/-, or
• Half month’s salary for each completed year of service, or
• Gratuity actually received.

Gratuity in excess of the aforesaid limits is taxable in the hands of the employee on due or receipt basis. The assessee can, however, claim relief u/s 89. (Provisions u/s 89 will be discussed in the next article.)

While calculating completed years, any fraction of the year shall be ignored. For instance , if the service of a retiring employee is 20 years , 10 months & 25 days , 20 years shall be taken for this purpose ignoring the balance of 10 month & 25 days.

Average monthly salary is calculated on the basis of the salary of 10 months immediately preceding the month in which the person retires, etc. ‘Salary’ for this purpose means Basic Salary, Dearness Allowance and Commission paid at a fixed percentage of the turnover, if the terms of employment so provide.

Where Gratuities are received by an employee from more than one employer in the same previous year or different years , the aggregate maximum amount of gratuity exempt from tax u/s 10(10)(iii) cannot exceed Rs.3,50,000/-.

- Rittique Phukan (CA)