Gratuity Under Income Tax Act sec 10(10): All You Need To Know
The gratuity payments are given by employers to employees on their retirement or given by employers’ family members after the death of employees. gratuity comes from the word gratitude which means thankfulness.
Under the Income Tax Act, gratuity is tax-exempt under section 10. This is because gratuity is a financial reward given by the employer to the employee for the services that he has rendered in the past.
How Can One Claim Gratuity Under Income Tax Act?
The person can claim gratuity under Income Tax Act if he falls in either of the following cases:
- Firstly, on superannuation or retirement
- Secondly, on resignation or termination
- Thirdly, on death or disablement due to accident or disease
- Fourthly, on retrenchment or layoff
- filthy in case he opts for Voluntary Retirement Scheme (VRS)
Calculation Of Amount Of Gratuity That Is Tax-Exempt
Gratuity relating to government employees
Gratuity relating to Non – government employees
The non-government Gratuity is related to payments of gratuity Act 1972(POGA). As per this act, it is there are 2 conditions:
- An employer must have two minimum employees working for in the last 12 months.
- Employees must have returned after a continuous 5 years.
Tax treatment of Gratuity when POGA(payments of gratuity Act 1972) is applicable.
For the employees on whom the Payment of Gratuity Act is applicable, the least of the following amounts is tax-exempt:
- Gratuity actually received
- Maximum amount Rs 20 lac
- 15 days of salary for every complete year of service & in case of a fraction of the year more than 6 months will take a full year.
salary × 15⁄26×complete year
Salary means basic salary + DA of one month immediately prceeding the last month of retirement.
Note:
in case of POGA employee if fraction is more then 6 month ,it shoud be rounded off e.g.
30 years 4 month 30 years 30 years 6 months 30 years 30 years 7 months 31 years
Take an example of a Jyoti jay non-govt employee, whose last salary (basic + DA) was Rs. 1,00,000 per month. He was in employment for a continuous period of 20 years and 5 months. Further, the gratuity actually received by him was Rs. 15,00,000
| particulars | Amount |
| Number of years of services | 20 years and 5 months |
| Gratuity actually received | 15,00,000 |
| Maximum exemption allowed | 2000000 |
| Gratuity | 15,00,000×20×15/26= 17307692 |
| Amount of exemption (least of the above 3) | 15,00,000 |
| Taxable Gratuity | NIL |
Tax treatment of Gratuity when POGA(payments of gratuity Act 1972) is Not applicable.
The least of the following will be exempt
- Gratuity actually received
- Maximum amount Rs 20 lac
- half months of average salary for every completed year of service (ignore fractions) i.e.( 15/30 × average salary×completed year of service
Note:
- average salary means the average salary for the last 10 months from the retirement
- Salary means basic salary + DA(forming part of salary for retirement)+ turn over the commission on % basic salary
In the case of POGA, not applicable employees, if the fraction is more than 6 months, it should be ignore e.g.
| 30 years 9 month | 30 years |
| 30 years 6 months | 30 years |
| 30 years 11 months | 30 years |
Take an example of a Miss. jyot jay retired on 15.6.2021 after completion of 26 years 8 months of service and received a gratuity of RS 15,00,000. At the time of retirement, his salary was
| Basic Salary | RS 50,000 p.m |
| Dearness Allowance | RS 10,000 p.m. (60% of which is for retirement benefits) |
| Commission | 1% of turnover (turnover in the last 12 months was RS 1,20,00,000) |
| Bonus | RS 25,000 p.a. |
Compute his taxable gratuity assuming
- she is a private sector employee and covered by the Payment of Gratuity Act, 1972
- she is a private sector employee and not covered by the Payment of Gratuity Act, 1972.
covered by the Payment of Gratuity Act, 1972
| particular | Amount |
| Gratuity received at the time of retirement | RS.15,00,000 |
| Less: Exemption under section 10(10) | |
| Least of the following: | |
| 1. Gratuity received | RS 15,00,000 |
| 2. Statutory limit | RS 20,00,000 |
| 3. 15 days’ salary based on last drawn | RS 15/26× (50,000 + 10,000) x 27 = 9,34,615 |
| Gratuity exempt | RS 9,34,615 |
| Taxable Gratuity | RS. 5,65,385 (15,00,000-9,34,615) |
she is not covered by the Payment of Gratuity Act 1972
| particular | Amount |
| Gratuity received at the time of retirement | RS.15,00,000 |
| Less: Exemption under section 10(10) | |
| Least of the following: | |
| 1. Gratuity received | RS 15,00,000 |
| 2. Statutory limit | RS 20,00,000 |
| 3. Half a month’s salary based on the average salary for the last 10 months preceding the month of retirement for each completed year of service |
1/2[(50,000 x 10)+(10,000 x 60% 10)+1% x (1,20,00,000 x 10/12)x 26]/10 = RS 8,58,000 |
| Gratuity exempt | RS 8,58,000 |
| Taxable Gratuity | RS.8,58,000 (15,00,000-8,58,000) |
Importamt notes of Gratuity
- Gratuity received during the period of service is fully taxable
- Where gratuity is received from 2 or more employers in the same previous year then
the aggregate amount of gratuity exempt from tax cannot exceed RS 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
RS20,00,000 will be reduced by the amount of gratuity exempt earlier
I hope you now understand Gratuity Under Income Tax Act.
