Gratuity and it’s Taxability

Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days gratuity has become a normal payment applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay gratuity.

Taxability [Section 10(10)]

Its treatment is discussed below

• Retirement gratuity received under the Pension Code or Regulations applicable to members of the Defence Service is fully exempt.
• Employees of Central Government/ Members of Civil Services/ local authority employees: Any death cum retirement gratuity is fully exempt from tax under section 10(10)(i).
• Gratuity received during the period of service is fully taxable.
  

Other employees

(i)  Employees Covered by the Payment of Gratuity Act, 1972

Any death-cum-retirement gratuity is exempt from tax to the extent of least of the following:   

• 20,00,000
• Gratuity actually received
• 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months

Note - Salary for this purpose means basic salary and dearness allowance. No. of day in a month for this purpose, shall be taken as 26.

(ii) Employees Not covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity received by an employee on his retirement or he is becoming incapacitated prior to such retirement or on his termination or any  gratuity received by his widow, children or dependents on his death is exempt from tax to the extent of least of the following:

• 20,00,000
• Gratuity actually received
• Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored)

Note - Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.

Note

• Where gratuity is received from 2 or more employers in the same previous year then aggregate amount of gratuity exempt from tax cannot exceed 20,00,000.
  
• Where gratuity is received in any earlier previous year from former employer and again received from another employer in a later previous year, the limit of 20,00,000 will be reduced by the amount of gratuity exempt earlier.