Gratuity – Eligibility Criteria, Taxability and Exemption

Gratuity is a voluntary payment made by an employer to employee as an appreciation of service rendered by such employee. In general words, gratuity is large amount of gift that is given to an employee by employer on retirement of employee after serving the organisation for a specified period.

Unlike provident funds, Gratuity is entirely paid by employer without the contribution from employee. Gratuity is payable by each organisation, whether government or not, which have MORE THAN 10 employees. However, an organisation having 10 or lesser employees may also provide gratuity to its employees but it is not mandatory for such organisations.

Amount so received as gratuity is taxable under Income Tax Act,1961. However, exemption is also provided in certain cases.

Eligibility Criteria for Payment of Gratuity

• Employee must be eligible for superannuation fund.
• Employee should retire from service.
• Employee at least serves an organisation for a continuous period of 5 years.

*In case of death of employee, his nominee would be eligible for receiving gratuity on behalf of such employee.

Taxability of Gratuity

Entire amount received as gratuity is taxable as per Income Tax Act,1961.

Exemption under Gratuity

1. If Gratuity is received during the period of employment then NO exemption will be provided to any employee whether employee of government firm or others.

2. If Gratuity is provided after retirement to the employees of any government firm then it is FULLY EXEMPT for tax purposes.

3. If Gratuity is provided after retirement to the employees of any organisation ,other than employees of government organisation, then exemption will be provided on following basis:

• If the employers are covered under Payment of Gratuity Act,1972 then exemption will be LEAST of following:

a) Actual gratuity received

b) Rs.20,00,000

c) 15*last drawn salary*tenure of working#/26

# Tenure of working is no. of years or part thereof in excess of 6 months for which employee provide service to company

• If the employer are NOT covered under Payment of Gratuity Act,1972 then exemption will be least of following:

a) Actual gratuity received

b) Rs.20,00,000

c) 15*last drawn salary*tenure of working#/30

# Tenure of working is no. of years or part thereof in excess of 6 months for which employee provide service to company

For Example: Mr. Ravi retired on 15.06.2022 after completion of 26 years and 8 months of service and received gratuity of Rs.15,00,000. At that time his salary was Rs,50,000. Compute his exemption under gratuity if:

a) He is private sector employee covered by Gratuity Act.

b) He is private sector employee NOT covered by Gratuity Act.

c) He is Government sector employee.

ANSWER:

a) When Mr. Ravi is private sector employee covered by Gratuity Act, his exemption will be least of following:

I. Gratuity received = 15,00,000

II. Threshold limit = 20,00,000

III. Eligible Gratuity = 15*last drawn salary*tenure of working/26

= 15*50,000*27/26
= 7,78,846

b) When Mr. Ravi is private sector employee NOT covered by Gratuity Act, his exemption will be least of following:

I. Gratuity received = 15,00,000

II. Threshold limit = 20,00,000

III. Eligible Gratuity = 15*last drawn salary*tenure of working/30

= 15*50,000*27/30
= 6,75,000

The author can be however contacted for further clarification at 9654182791 or via mail at [email protected]

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