Bhadkamkar A V

Bhadkamkar A V

Date: 15-02-2019

Gratuity Act Amendment – Grievance of majority employees.

The maximum gratuity payable under The Payment of Gratuity Act and exempted under The Income Tax Act is raised from Rs. 10.00 lacs to Rs.20 lacs from 29-03-2018. Apparently on this decision all employees will rejoice. But as it happens always, the employees drawing fat salaries will only get benefit. The details are as under.

The gratuity is payable only if the employee is in the continuous service of minimum 5 years. Gratuity is payable @15 days last drawn salary (Basic + DA) per year of service. To arrive at the rate per day, monthly salary (Basic + DA) is divided by 26. The exemption of Gratuity is also calculated @15 days salary per year of service.

If an employee joins the service at the age of 18 and retires at the age of 60, he will serve for maximum 42 years in the Company. The following table shows that what should be the last drawn salary to receive  the maximum tax free gratuity of 20 lacs for the corresponding service, as per The Payment of Gratuity Act.

Total Service  Years Monthly Basic + DA for receiving  Maximum Rs.20 lacs gratuity 
42   Rs. 82540/-   (82540/26*15*42)
35  Rs. 99048/-
30 Rs.115556/-
25 Rs.138667/-  (138667/26*15*25)
20 Rs.173333/-
15 Rs.231111/-
10  Rs.346667/-
5   Rs.693333/-  (693333/26*15*5)

The large no. of employees will not be in the above range of salary corresponding to service to get the benefit of Exempted Gratuity of Rs. 20 Lacs.

If the gratuity is paid as per The Act i.e. 15 days salary per year of service, it is exempted under The Income Tax subject to the above limits.

If any Company is paying gratuity more than the Act, say 20/26 days per year of service, the exemption is available @15 days of last drawn (Basic + DA). Example is given below.

If an employee retires after say 25 years of service getting say Rs.39000/- as Basic + DA and say monthly salary including allowances Rs.70000/-. His Company pays gratuity say @ 26 days salary per year of service.

The Gratuity payable to him will be Rs.975000/-. (39000/26 *26 days per yr of service *25 yrs service =975000/-)  As per The Income Tax Act, the exempted gratuity will be Rs.562500. (39000/26*15 days per year of service *25 yrs service=562500) He will have to pay tax on Rs.412500/-(Rs.975000 – Rs.562500).

The funniest part is the full amount of Gratuity paid is allowed as expenses for the Company. However, the employee has to pay Tax if he gets gratuity more than payable under the Act.

If the Government sincerely wants to pass on the benefit, full gratuity paid at whatsoever no. of days per year of service upto Rs.20 lacs should be exempted from Income tax. It is the amount received for past many years of service, then how can it be taxed as income in one year? The PF / PPF  accumulations, LIC policy maturity amount, are rightly tax exempted amounts without limit as contributions / investments are for very long period. On the same principal gratuity amount should be tax free upto Rs.20 lacs. Otherwise very few persons who are drawing fat salaries will only be benefitted.

(Author can be reached at M – 9967683680 Tel – D 022-62162829)

Author Bio

Qualification: Graduate
Company: Agrocel Industries Pvt Ltd.
Location: DADAR MUMBAI, Maharashtra, IN
Member Since: 18 Feb 2019 | Total Posts: 4

My Published Posts

More Under Income Tax

5 Comments

  1. Chandra Ahuja says:

    Friends

    I worked with a company for 8 years & resigned, company not paying gratuity by saying that its treated in CTC. I have received F&F but with out Gratuity.Please advice

    1. Gratuity amount is normally included in CTC but it is payable only on separation. It is paid on the basis of last drawn salary. Then how can it be paid monthly thru’ salary? It is taxfree income if paid as per The Gratuity Act. If you can send me your CTC breakup, salary slip and F & F statement, i may be able to advise you. You can also file complaint with Asst. Commissioner of Labour in your state. My e-mail id is avb@agrocel.net..Send me your e-mail id. Bhadkmkar A V m- 9967683680

Leave a Comment

Your email address will not be published. Required fields are marked *