Esha Agrawal

Esha AgrawalJob-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched.

Going by the book:-

  • Gratuity is a reward for long and meritorious service.
  • In 1972 the government passed the Payment of Gratuity Act that made it mandatory for all employers with more than 10 employees to pay gratuity.
  • Gratuity shall be payable to an “employee” on the termination of his employment

after he has rendered continuous service for five years or more

Who Are the Establishment Covered Under Gratuity Act?

  • Every factory, mine, oil field, plantation
  • port, railways, shop & Establishments OR
  • educational institution

Employing 10 or more persons on any day of the preceding 12 months

Waiving the rule

  • Gratuity is payable only if you have been with the employer for five years or more.
  • But this rule is waived if an employee dies or is disabled, superannuation, retirement or resignation.
  • In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.

Caution:- Here employees are defined as those hired on the company’s payroll. Trainees and interns are not eligible for this compensation.

To whom is Gratuity Payable in case of death?

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.

Formula For Gratuity Accounted:

i) Actual gratuity received

ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months

iii) Rs 10 Lakhs

Exempted From Tax

Amount should be Minimum of the Following:

i) Actual gratuity received

ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months

iii) Rs 10 Lakhs

Employees Who Get Exemption Under Section 10(10) Are:-

  • Government employee and employee of local authorities.
  • Employee covered under the Payment of Gratuity Act, 1972
  • Other employees not covered under the Payment of Gratuity Act, 1972

How Are Gratuity Accounted for Government Company and Non-Government Company?

Government Company Non- Government Company
TaxExemption  The Entire Amount You Get is Exempted(under Section 10(10)(i) 

 

Amount should be Minimum of the Following:i) Actual gratuity receivedii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months.

iii) Rs 10 Lakhs

(Under Act 1972)

 IMPORTANT :-

1. Whether TDS is to be deducted by employer on payment of Gratuity to Employees?

Only where the Gratuity amount exceeds the Exemption Amount as calculated under section10(10) of Income tax Act, TDS shall be deducted otherwise no.

2. Whether Insurance is Mandatory for Gratuity Fund?

Not Mandatory

3. If we show the Gratuity as Part of salary How we Manage and do Accounting?

It cannot be stated as part of salary.

4. If an employee whose gratuity is withheld pending completion of the proceedings is he entitled to interest on gratuity ?

The employee is entitled to interest also from the date of Gratuity till the payment of gratuity. Case law:- Supreme Court ruled in Y.K. Singla v. Punjab National Bank.

The Act does not force you to make any provision or any gratuity fund. You are to make the payment of gratuity to the eligible employee as and when is due to be paid.

Example for Calculation Of Exemption Of Gratuity:-

Mr. X receives following amount in previous year:

  • Gratuity receive 3,00,000
  • Year of service 30 years 7 months( excess of 6 month should be taken as full year)
  • Average salary 20000

Calculation:

  • 3,00,000
  • (31 * 20,000 * 15/26) = 357692.31
  • 10,00,000

Therefore 3,00,000 shall be exempted .

Practical Issue seen:-

Employer has resigned after working for more than 5 years. Employer signed the full and final settlement letter stating he has no dues pending from company. Full and final settlement letter does not mention anything about gratuity, Now after 3 months employee has submitted a letter claiming for gratuity. Is Employer liable to pay gratuity to employee?

Employer is liable to pay gratuity to the employee even after full and final payment, mere by signing that he/she receive all payment does not effect his /her right to claim gratuity.

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15 responses to “Gratuity – Legal Provisions and Taxation”

  1. AKASH JAISWAL says:

    Hi I join birla sun life insurance company 10th September 2012, and I resign 9th Aug 2017.
    Can I eligible for gratuity amount.
    Kindly help me , mail me my answer

  2. Nirmal says:

    The gratuity is calculated for joining date are after confirmation of company date.

  3. Nirmal says:

    The gratuity is calculate for joining date are after confirmation company date please tell me.

  4. RADHESHYAM PUROHIT says:

    my company give a gratuity to its employee rs 400000/- in 2 part in two FY
    what is the amount of gratuity expenses we can claim in our bussiness expenditure
    full 4 lakh
    or 2 lakh
    or any other

    Thankyou

  5. Venkata Prasanth says:

    What does company should do if the age of the company itself is less than an year.

  6. anantha shetty says:

    every year gratuity provision entry in tally of completion of 5 years

  7. MAYANK BAXI says:

    I received gratuity from one employer as per rules in 2008.
    3.50 lacs Tax free and rest 1.00 lac taxable.

    Now I am supposed to receive gratuity from another employer in 2016.

    Please let me know the tax provision for the gratuity I will be receiving in 2016.

  8. Nishat says:

    I worked for three years in a firm and left the job for some personnel reasons but on the request of the management I again joined my same position in the same firm after a gap of three months. Now re-joining after a gap of about three months I have again completed three years there. I want to know if legally I am eligible for gratuity or not. As I have completed almost six years in the same firm but with a gap of three months. In those three months my name was nowhere in the payroll of the firm. Can anybody suggest me

  9. meenakshy says:

    Please comment on the taxability in the hands of EE on interest received on account of payment of gratuity.

  10. Sanjib says:

    As Per My Knowledge,
    Employees Who Are In AP State Will Be Paid Service Compensation If Their Service Is More Than 1 Year But Less Than 4 Years And 10 Months.
    Employees Whose Service Is More Than 4 Years 10 Months, Gratuity Act Is Enabled And Not Service Compensation.

    Now my query : Is amount received as Service Compensation on separation/retirement taxable fully like income from Salary?
    If not what is the calculation for tax? Please suggest.
    Moreover is there any relief u/s 89 for Service compensation like Gratuity?

  11. Hemant Patida says:

    Hi,
    which article/section explains that “15 days Basic and DA for each completed year of service or part thereof in excess of six months “?
    I have resigned from my last organization after service of 6 yrs 6 month and 10 day and they are calculating gratuity for 6 yrs? As per rule what are my yrs for gratuilty?
    Thanks

    • seban says:

      Mr. Patida, according to the Govt. ruling if your serce covered over a single day after 6 month, it should calculated as one year. so,as in your condition yours should calculated as 7 year.

  12. Nagaraj T V says:

    21-10-2014 Bangalore
    On gratuity Issue I have an issue with SBI.
    Can you solve this issue?
    The issue:-
    On my retirement date on 28-02-2007,
    I was eligible to receive gratuity of Rs.503012/- as per formula.
    On 07-05-2007 I received only Rs.350000/- being the ceiling
    amount at that time. Now ceiling is raised to Rs.10 lakhs under
    section 4(3) w.e.f. May 2010.
    Now I am eligible to receive remaining amount of Rs.153012/-
    under the revised ceiling.
    State Bank of India, my ex-employer, refused to pay on this issue.
    SBI is an undischarged debtor to me under section 4(3) amended
    section of Gratuity Act (ceiling Rs.10 lakhs) and also under
    section 37 of Indian Contract Act (dealing with performance).
    SBI refused to pay.
    The law states that I am eligible to receive.
    Reason : Part payment never discharges full payment
    under any statue . That is, can Rs.350000/- = Rs.503012/-?
    Is it equal?

    Can you solve this as a challenging issue.
    There is larger interest since many people will be benefited
    If this issue is solved. MY PAN NO.ABTPN5713D.

  13. Praveen reddy says:

    Very gud Article sir.Really helpfull.
    Can i know what is tds % deducted if amt payable exceeds exemption amount.
    Please provide an example in this.

  14. s sudarshana says:

    Very good article. Particularly to whom payable and tax exemption.

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