• May
  • 27
  • 2010

Tax treatment of Gratuity after Increase in limit from 3.50 lakh to 10 lakh

Posted In Income Tax | 45 Comments » Print Friendly and PDF

The government notified the Payment of Gratuity (Amendment) Act, 2010 on May 18, 2010, which increases the limit of gratuity payment to employees in the specified sectors/establishments covered under the Payment of Gratuity Act, 1972 (“Gratuity Act”). After the amendment, these employees are eligible to receive gratuity up to Rs 10,00,000, which was earlier restricted to Rs 3,50,000. Thus, crores of workers will be benefited in establishments covered by the Gratuity Act.

Meaning of Gratuity :-Gratuity refers to the emoluments received by an employee from his employer in gratitude for the services rendered. Such sum can be paid on retirement, resignation, superannuation, death or disablement. Under the Gratuity Act, the sum can be paid only after an employee has rendered continuous service of not less than five years. Exceptions being termination of employment on account of death/disablement.

Eligibility criteria:-Gratuity shall be payable to an “employee” on the termination of his employment after he has rendered continuous service for not less than five years.

  • On his superannuation.
  • On his retirement or resignation.
  • On his death or disablement due to accident or disease.

Note: However, the condition of five years of continuous service is not necessary if service is terminated due to death or disablement.

To whom is Gratuity Payable?

Gratuity is normally payable to the employee himself, however in the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs. Incase the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Taxability of Gratuity

From a tax perspective, gratuity received by an employee is taxable as salaries. The Income tax Act segregates the employees receiving gratuity on the following basis:

==> Government employees;

==> Non – Government employee covered under the Gratuity Act.

==> Non – Government employee and not covered under the Gratuity Act.

Based, on the above segregation, necessary exemptions from tax can be claimed on the gratuity received.

Exemption available for employees covered under the Gratuity Act

In case of employees covered under the Gratuity Act, exemption is limited to the extent of minimum of the following:

i) Gratuity actually received

ii) 15 days salary for every completed year of service or part thereof (i.e. services in excess of 6 months will be treated as full year service)

iii) Rs 3,50,000 (the maximum limit as provided in the Gratuity Act)

The increase in limit to Rs 10,00,000 in the Gratuity Act (from the erstwhile Rs 3,50,000) in a way indicates that the tax exemption may also increase.

As per the Act, the gratuity amount is 15 days’ wage multiplied by the number of years put in by you. Here wage refers to basic salary plus dearness allowance. Take the monthly salary drawn by you last (basic + dearness allowance) at the time of resignation or retirement. Divide this by 26. This gives you your daily salary. Multiply this amount by 15 days, and further by the number of years of service you have put in.

If you have put in 10 years and seven months in an organisation, your service period will be taken to be 11 years. But if your service tenure is 10 years and five months, then for the purpose of this calculation your tenure will be taken to be 10 years only.

Take an example. Suppose that your average monthly salary is Rs 26,000. Your daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The gratuity you are entitled to after 10 years of service will be Rs 1.5 lakh.

Formula :- Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary x 15/26 x No. of years of service

Your last drawn salary will comprise your basic + DA. For computation of gratuity, your service period will be rounded off to the nearest full year.

Tax impact of the amendment

The tax impact can be explained by way of an example. Suppose, Mr A retires from a software company after servicing for 35 years and at the time of retirement his basic salary was Rs 50,000 per month.

Upon retirement, Mr A is eligible for a gratuity payout of Rs 10,00,000 and is covered under the Gratuity Act.

This example indicates that by increasing the limit, Mr A will be getting more gratuity and also a significant tax benefit.

Taxable amount of gratuity in different scenarios

Taxable Gratuity – Pre Amendment Taxable Gratuity – Post Amendment
Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 3,50,000

Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days Salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 10,00,000

Exempt Gratuity = Rs 3,50,000 Exempt Gratuity = Rs 10,00,000
Taxable Gratuity = Rs 10,00,000- 3,50,000 = Rs 6,50,000 Taxable Gratuity = Rs 10,00,000- 10,00,000 = NIL

Open issues

There are some open issues in terms of the date from which the higher limit is applicable and whether a separate clarification/notification will come from a tax perspective. The increase in limit has got the president recently and it seems that the open issues will get clarified soon.

Conclusion

The above amendment in the Gratuity Act is a welcome step by the government and will bring lots of cheer to employees across the private sector.


45 Responses to “Tax treatment of Gratuity after Increase in limit from 3.50 lakh to 10 lakh”

  1. We a few retired executives of Coal India have filed a writ petition before the Hon’ble High Court of Jharkhand at Ranchi praying inter-alia for modification of effective date for payment of enhanced ceiling limit of gratuity of Rs.10 Lakhs w.e.f.1.1.2007 instead of 24.5.2010 mentioned in the notification issued by Ministry of Labour & Employment,New Delhi( because it is arbitrary and goes against Art.14 of the Constitution,as similarly placed employees have been deprived of their right to get ((full ceiling limit of Rs.10 Lakhs without tax deduction w.e.f.1.1.2007.As a matter of fact,there was no co-ordination between the Ministries, as Ministry of Labour & Employment has not taken into consideration the Office Memorandum issued by Ministry of Heavy Industries,New Delhi
    for implementation of revised salary and perks by all Govt.Undertakings,for executives of Public Sector Undertakings w.e.f.1.1.2007,as per directives of President of India,including payment of revised ceiling limit of gratuity of Rs.10 Lakhs. It is needless to say that ceiling limit is always exempted from income tax,otherwise the respective govt.companies are to pay gratuity as per provision of Payment of Gratuity Act,which may be more than ceiling limit of Rs.10 Lakhs for maximum executives.That is why Govt.has issued revised ceiling limit of Rs.10 lakhs alongwith revision of salary w,e.f.1.12007. So,on one side employees have been deprived of their
    claim of gratuity as per provision of Gratuity Act and on the other hand income tax has been deducted from ceiling limit of gratuity,which is arbitrary.

  2. T C Abraham says:

    I was a cooperative bank employee retired on 30.05.2009 and received an amount of 350000 rs as Gratuity. can i file an affidavit for granting an amount of 1000000 as gratuity as per the revised law? Am i able to get this amount? If Yes/No on which grounds?

  3. Ramandeep Singh says:

    Our Employee who retired on 21-07-2006, he received his Gratuity Rs.350000 at the time of his Retirement. Now we paid them Revised Gratuity as per Sixth Pay Commission on 15-07-2013. Is the Revised Gratuity Taxable or not. If Yes then why ……………..

  4. D Saha says:

    I have been retired from a Central PSU in Feb2010 . As per terms of retirement ,I had vacated my quarter (provided by company) on 24/05/2010.On submission of vacation report my Gratuity payment becme due and finally the same was paid on during july 2010 . however tax was deducted on Rs 6,50,000/ the diff betn rs 10 lacs and rs 3.5 lacs.
    Is there any possibility of getting refund on tax deducted on this Rs 6.5 lacs.

  5. jitender kaur says:

    i got arrear of my salary after december and accordingly deposited tax. there was no columnto mention the date of receiving the arrear. incometax department has asked for interest under different sections . what should i do?

  6. jitender kaur says:

    i retired on 31/12/2006. i got arrear of gratuity 1lakhafter receiving 350000 at the time of retirement. will it be taxable?

  7. CJG says:

    It is most unfortunate that the Board Level/Below Board level Officers of Central Govt. PSU’s have been paid arrears in gratuity. However, the non unionised Supervisors have been left out totally inspite of the DPE Notification dated 26.11.2008 clearly stating that the Supervisors too are to be given enhanced gratuity arrears wef 01.01.2007. This is what the final outcome is. Public are given high hopes and these hopes are shattered by the Ministry/Departments of the Govt. by not implementing the rules framed by the DPE which is a nodal department for all the CPSE’s. But when it comes to the M.P.’s salaries, there is no debate and rules are implemented almost immediately. Isnt this injustice as M.P.’s get their salary from our taxes?

  8. Lalji Singh says:

    Dear sir,I have join my service on adhoc in U.P. Govt.,which was regularised after 5 year.Please specify,adhoc service can be counted in gratuity or not.

  9. V V S Gupta says:

    4 years and 6 months service or 4 years and 7 months service – Is it eligible for Gratuity.

  10. V V S Gupta says:

    Dear Sir

    If I work with my existing Company for 4 years and 6 months or 4 years and 7 months, am i eligible for Gratuity.

  11. dear sir,
    I would like to know whether TDS is applciable on enhanced limit of gratuity from 3.5 lakhs to 10 lakhs as per recent notification dated 24/05/2010. As my husband expired on 23/05/2010 & lastely he had attended the office on 21/05/2010. 22/05/2010 / 23/05/2010 being hoildays. He was working with NTC being PSU under the ministry of Textile. NTC has deducted the Rs 91800/- TDS on gratuity amount. Please confirm whether TDS should have been deducted or not. under section 10(10)iii ,192 of income tax act.

  12. pgshastry says:

    DEAR ZEPHYRINE GOVRAS, I hAVE SENT EMAIL TOSUSHMA SWARAJ ADVANI TO TAKE UP THIS MATTER. MY EMAIL TO F.M. IS NOT REACHING FAILURE REPORT COMING. KINDLY OBTAIN EMAIL ADDRESS FROM GOOGLE SEARCH AND SEND E.MAIL TO ALL LEADERS EVEN THOUGH THEY ARE THERE FOR THEIR SELF -PGOPAL SHASTRY POST BORIMAR (VIA) MANI- BANTWAL TQ-574253.

  13. vijay kumar Sande says:

    Refer my e-mail dt.09-08-2010 at9.36 p.m. regarding tax treatment of enhenced limit of grauity .In my request to honourable President of India and others to amend the order, the date of effect is wrongly indicated as 01-01-2010.It is requested to read it as 01-01-2007 in stead of 01-01-2010.The mistake is highly regretted.

    vijay Kumar Sande,
    Nagpur-440022.

  14. Zephyrine Goveas says:

    While all employees retired between 1.1.2007 and 23.05.2010 feel aggrieved at the gross discrimination by the Govt., can a Writ Petition be filed in the Supreme Court against this injustice? While this website is a forum for comments from aggrieved, are these being channelised to the concerned authority, viz. Labour/Finance Ministry?

  15. vijay kumar Sande says:

    Govt. of India had been kind enough to increase payment of gratuity from 3.0 lakhs to 10.0 lakhs w.e.f.01-01-2007 for all sorts of employees.But exception from income tax for enhanced limit has been made effective from 24-05-2050. It is unfortunate and surprising.It is not understandable,when effective date of payment of enhanced gratuity is 01-01-2007 then why income tax exempt date is kept from 24-05-2010.Most of the govt, PSU and private sector employees retired before 24-05-2010 have to pay income tax on the enhanced amount of gratuity. The Govt. order does not appears to be logical and needs to amended in the interest of many employees retired before 24-05-2010.

    I earnestly request honorable President of India,Finance Minister and Labour Minister to look in the matter logically be kind enough to amend the order making it effective from 01-01-2010 so that those unfortunate employees may submit revised return for requesting refund of the tax deducted.

    Sincerely yours
    Vijay Kumar Sande,
    Plot No-111, Telecom nagar,
    Nagpur-440022.
    (Retired from Coal India Ltd on 30-11-2007)

  16. IK ARORA says:

    Sir,

    Thousand of employees retired from various PSUs after the implementation of new pay scale i.e. 1st Jan., 2007 to 23rd May, 2010 and got gratuity upto Rs.10.00 lakhs as per instruction from Govt. But PSUs have deducted TDS and we are losers of Rs.2.00 lakhs approx.

    We request to the Finance Minister for issuing a new notification to exempt gratuity upto 10 lakhs so that we file revised return for refund of IT.

    IK ARORA
    RETIRED PSU EMPLOYEE

  17. Zephyrine Goveas says:

    The PSU employees who have received enhanced gratuity during 1.1.2007 to 23.5.10 are discriminated. These employers have deducted TDS. In other words, there is no exemption on the enhanced gratuity. Is this website conveying the discrimination felt by these employees because they are losers to the extent of Rs.2.00 lakhs approx.

  18. A. Gupta says:

    The appeals of Mr.K. Ravindranath and Mr.Sarkar are verymuch relevant.All the Public and Private Sector Unions must take up the issue with Finance Minister for issuing amendment to the notification of June2010,for revising the effective date to 1.1.2007 or atleast cover a financial year in place of 24.5.2010 for income tax exemption of the gratuity upto Rs.10,00000.

  19. p k gupta says:

    please confirm tax treatementon death cum retirement gratuity above 5 lacs on1.1.2006 for.employeeof u p power corporation i.e up govt undertaking

  20. P R SARKAR says:

    The comments and clarification asked by Mr.K.Ravindranathan on 25-07-2010 are justified. Govt.Deptts. should take early action by issuing notification correcting the IT Exemption date under payment of gratuity act from 24.5.2010 to 01.01.2007.

  21. K.RAVINDRANATHAN says:

    While gratuity ceiling is inceased from Rs.3.5lakhs to Rs.10.00 lakhs with effect from 01.01.2007 by amending payment of gratuity Act,income tax exemption for the enhanced ceiling is made applicable only from 24th May 2010 i.e the date of notification. There is no logic in denying the IT exemption for only those who received the enhanced gratuity amount during the period 1.1.2007 to 23.5.2010.TDS was deducted by the employers from those who received gratuity amount in excess of earlier limit that is Rs.3,50,000/. In many cases retired employees were paid the difference in gratuity after deducting TDS without their demanding for the same. Employers should have obtained option from retired employees either to pay immediately or to pay later after receipt of notification regarding effective date of IT exemption. Under these circumstances the labour/finance ministry is requested to amend the effective date of IT exemption under payment of gratuity act from 24.5.2010 to 01.01.2007.

  22. pkh says:

    Differentiate and rule is the game.
    Take for example the income tax slabs – women are different from men and men also differ – senior citizen and non senior citizens.

  23. Nanak Dass says:

    I also wanted to know about tahe exemption date, but after reading the details, my query is answered. This needs clareification from the govat.side.

  24. anirudh says:

    I request all to please go through the wording in income tax act sub part (iii) gratuity exemption portion u/s 10(10). does it mean that the exempted gratuity amount will work out less than the gratuity amount as per gratuity act.pl read the wording carefully. also some one clarify “month” = how many days as per iii above.and salary also needs clarification

  25. K UDAYANANDAN says:

    The recent decision by the Cabinet reg. IT Relief on increased Gratuity over & above Rs.3.5 lacs is effective from 24-05-10 and those who retired from services prior to May ’10 are not eligible for this relief. In fact, the upward revision of Gratuity from Rs.3.5 lacs to Rs.10.00 was made effective from 01-01-07 for the PSU employees and, hence, it is logical that the exemption is also given effect from 01-01-07. The argument against this is that not all employers are in a position to give the extra gratuity. The question is not whether all the employers are able to give the extra gratuity; but, IT exemption to be granted up to Rs.10.00 lacs for the employees w.e.f. 01-01-07 i.e. from the date of implementation of the enhanced gratuity amount. Hence, this decision is to be revised to give relief to the employees retired from service prior to 24-05-10 also.

  26. M. Ravinder says:

    I fully subscribe to the views expressed by Mr. A.K. Talwar (S.No. 14). The effective date of implementation for payment of Gratuity at revised rates should be the same ( the date of Sixth Pay Commission coming into effect i.e. 1.1.2007) irrespective of whether the employee is a Central Govt. or PSU or Private. There should not be any discrimination on this issue as it violates fundamental rights of individuals.

  27. Asim Sengupta Advocate says:

    pragmatic decision is required by the labour ministry to solve the problem of retired employees giving effect of exemption of 10 lakhs with retrospective date of 1 01 2007 due to pay revision of salary of psu implemented

  28. K.C.Jain says:

    The payment of gratuity under the gratuity act should be effective from 1.1.2006,as the central govt employees are also getting.
    Thanks,
    K.C.Jain

  29. K.C.Jain says:

    To,
    The Minister,
    Govt of India,
    Department of Labour,
    New Delhi,

    Respected Sir,

    The payment of gratuity under the gratuity act should be effective from 1.1.2006,as the central govt employees are also getting.
    Thanks,
    K.C.Jain

  30. Dr PN Pandey says:

    Thanks to parliament to ammend the gratuity act enhancing the limit.
    Making it effective from 24-05-2010 for private sector employees voilates the fundamental right of equality as it applicable for others w.e.f 1-1-06 .
    The gratuity amount is exempted from Income Tax before 1-1-2006 and also exempted after 24-05-2010, while different rules are applied for tax treatment between 1-1-06 and 24-05-2010.This is against the law of equality.
    Government should clarify and make the things straight.
    Dr Pandey

  31. S. RAMDASS says:

    The Notification is a discriminating communiation. When the Govt.employees of Central Govt. and certain State Govt. got the enhanced limit of Gratuity wef 1-1-06, what prevented the Govt.of India to grant the enhanced limit of Gratuity to all its PSUs and state PSUs and private sector to give effect from the same date
    01-01-2006? Will the Central Govt.once again take action to change the date of effect for the benefit of a larger amount of retired perople after 01-01-2006?

  32. A K TALWAR says:

    A very useful write-up.Logically IT exemption limit on enhanced gratuity should be effective from the same date as that of implementation of sixth pay commission, for all employees covered by sixth pay commission including Central Govt. employees

  33. Venugopal - P says:

    I retired from a Central Govt. U/taking in July 2007 and gratuity of Rs.3,50,000/- was paid at that time. Since the entire amount of Rs.3,50,000 was exempted from I.Tax. no TDS on gratuity was deducted. Subsequent to revision of salary w.e.f.01-01-2007 and enhancement of gratuity to Rs.10 lakhs balance amount amounting to Rs.5,99,760/-(after making TDS of Rs.50,240-)was credited to my bank account on 09-09-2009. Further i have already paid the advance tax for the AY 2010-2011,after claiming relief U/s 89.kindly advise me whether i would be be eligible for the refund of tds (Rs 50240) deducted on my arrear gratuity..

  34. M JAGADISH says:

    thanks very good information
    pl send a copy of the circular to my emailid

    jagadish66@yahoo.com

  35. bijendra says:

    it is very useful article….

  36. KA Salian says:

    Now the notification is issued and the effective date is 24.5.2010.
    I am at a loss to understand how the labour minister can discriminate between Govt and private sector employees. Gratuity amount was paid to Govt sector employees with effect from 1.1.2006 although the sixth pay commission was passed in 2009.

    All the people retired after 1.1.2006 were expecting that the effective date of the amendment shall be in line with sixth pay commission. With the cost of living going up everyday, the retired employees were expecting some relief and the labour minister buldozed the hope and the expectation is shattered.
    I appeal to all the retired employees to come-together and make a petition the government. Can someone from the retired fraternity with law background take a lead on this take the just demand forward.

    I have the copy of the notification but do no know how to attach to this mail

  37. Chidambar Samant says:

    Plese tell us who has the authority to decide that, the employees are covered under the gratuity act? or Not.
    I am working in TATA Motors CVBU Pune. As per our wage settlement our gratuity rate is more that the Gratuity Act.ie more than 15 days wages per year.
    Then whether we are covered under the Gratuity act or not?
    If Not? Why?
    If yes. Then why our Company is using section 10 [10](3) for I Tax exemption of Gratuity?
    Why our Company can not use section 10 [10](2 for I Tax exemption.
    CBDT clarification on this matter can only provide benefits to ordinary employees.
    The latest amendment is beneficial to only high salaried employees.

  38. ashish says:

    If someone is retired in the month of May, 2009, is he eligible for the increased gratuity? Please clarify.

  39. pankaj says:

    pls let us know about the tax treatement for employees not covered under gratuity act

  40. Dilip Kumar Das says:

    You may kindly e-mail to me about the date of effectivity of The Payment of Gratuity (Amend.)2010 which raised from Rs.3.5lakhs to Rs.10lakhs.

  41. RANJAN says:

    THANK YOU FOR THE DETAILS OF INCREASED GRATUITY OF Rs. 10.00 LAKHS.
    BUT MY EMPLOYER OIL INDIA LTD. HAVE ALREADY DEDUCTED AN AMOUNT OF Rs.1,78,550.00 AGAINST Rs. 6.50LAKHS THROUGH TDS IN FORM 16.

    PLEASE INTIMATE ME THE PROCEDURE TO GET THE REFUND OF THE ABOVE TDS.
    YOUR EARLY REPLY IS SOLICITED
    RANJAN

  42. KA Salian says:

    The most important issue now is the effective date and thousands of retired empolyees are eagerly waiting hoping that the date shall be in line with sixth pay commisson i.e. 1.6.2006

  43. Deepak says:

    Dear Sirs

    Pl. furnish the Notification No./ Gazette No. Dtd. 18/05/2010 pertaining to enhancement of gratuity amount from rs. 3.5 lacs to Rs. 10 Lacs. Tax free.

    Deepak

  44. S.Ramaswamy says:

    Would appreciate, if the limit of five years is reduced to three years as the eligiiblity for the gratuity. Hope, the govt shall look into this matter as well as it is beneficial to the employees.

  45. Jignesh Patel says:

    Thanks, nice information. This will definitely help to us.

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