Taxability of Gratuity

TAXABILITY OF GRATUITY UNDER SECTION 10(10) OF INCOME TAX ACT, 1961

MEANING OF GRATUITY

Gratuity is the benefit which is given by the employer to employees on a gratuitous basis at the time of his leaving the job. With the enactment of Payment of Gratuity Act 1972, gratuity has become a statutory obligation on the part of the employer.

Gratuity is fully chargeable to tax if it is given during the continuity of the job.

DEATH CUM RETIREMENT GRATUITYSECTION 10(10)

1. EMPLOYEES OF STATE GOVERNMENT/ CENTRAL GOVERNMENT/ LOCAL AUTHORITY

Any gratuity received by Central government or State government or local authority employees is fully exempt from tax.

2. EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT 1972

Any gratuity received by employees covered under the payment of gratuity act 1972 shall be exempt to the extent of least of the following:

1. Gratuity received
2. Rs. 20,00,000
3. Last salary* x number of years of employment x 15/26

*Last salary = Basic salary + Dearness Allowance

Let us understand this by taking an example:

Example– The last salary drawn by Mr. Sohan is Rs. 2,00,000 (basic+DA). He is entitled to receive Rs. 17,00,000 as gratuity. He has been in employment for the last 19 years and 7 months.

Solution-

Exemption shall be least of the following:

1. Gratuity received – Rs. 17,00,000
2. Rs. 20,00,000
3. Rs. 2,00,000 x 20* years x 15/26 = Rs. 23,07,692.31

Sohan is liable to receive an exemption of Rs. 17,00,000.

*Number of years in service shall be rounded off in the nearest full year.

3. ANY OTHER EMPLOYEE

Any gratuity received by employees not covered under the payment of gratuity act 1972 shall be exempt to the extent of least of the following:

4. Gratuity received
5. Rs. 10,00,000
6. Last 10 month’s average salary* x number of years of employment x 1/2

*Salary = Basic salary + Dearness Allowance

An average salary of previous 10 months is considered.Let us understand this by taking an example:

Example– Mr. Mohan is entitled to receive gratuity of Rs. 12,00,000. He has been in employment for 23 years and 4 months. The average salary of last 10 months is Rs. 85,000.

Solution-

Exemption shall be least of the following:

1. Gratuity received – Rs. 12,00,000
2. Rs. 10,00,000
3. Rs. 85,000 x 23* years x 1/2 = Rs. 9,77,500

Mohan is liable to receive an exemption of Rs. 9,77,500.

*Number of years in service shall be rounded off in the nearest full year.

Taxability of gratuity shall be as under:

Actual gratuity received Rs. 12,00,000

Exemption allowed (Rs. 9,77,500)

Taxable gratuity Rs. 2,22,500