In respect of other employees, it is to be determined whether they receive gratuity from an employer covered under the Payment of Gratuity Act, 1972 or not. It is pertinent to note that every gratuity payment received by an employee is not exempt from tax per se. In this context, it is important to note the provisions of the Payment of Gratuity Act, 1972 read with the Income Tax Act, 1961. 

Payment of Gratuity Act

Any gratuity received by an employee from an employer covered under the Payment of Gratuity Act, 1972 to the extent it does not exceed an amount calculated in accordance with the provisions of the Gratuity Act is not taxable. Recently, the government increased the limit from Rs 3.5 lakh to Rs 10 lakh w.e.f. 24 May 2010.

Organisations covered under Gratuity Act

The Gratuity Act applies to every factory, mine, oilfield, plantation, port and railway company. It also applies to every shop or establishment covered under the Shops and Establishments Act/regulations of a state, in which 10 or more persons are employed or were employed on any day of the preceding 12 months. Further, it also applies to such other shop or establishment, as the central government may prescribe. A shop or establishment to which the Payment of Gratuity Act becomes applicable would continue to be covered, even if the number of persons employed by it subsequently falls below 10.

When is gratuity payable?

Gratuity is payable to an employee on the termination of employment after he has rendered continuous service for not less than five years or such other time as prescribed in respect of the specified industries/sectors.

Termination of employment may be on account of superannuation or retirement or resignation or death or disablement due to accident or disease. In the unfortunate event of death or disablement, the aforesaid time limit is waived off.

Amount of gratuity

The gratuity is to be computed at the rate of 15 days of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. In case of employees earning monthly wages, the month is reckoned to be of 26 days and computation is to be done accordingly.

Certain other computation methods are prescribed for few specific industries/sectors. Till recently, the amount of gratuity payable to an employee was not to exceed Rs 3.5 lakh. This limit has been revised to Rs 10 lakh.

Gratuity received by other staff

In case of gratuity received by employees, other than under the Payment of Gratuity Act, the amount is not taxable to the extent of the prescribed limits as per the provisions of the Income Tax Act.  The limit of Rs. 3,50,000 has been specified as the limit in case of retirement, etc., on or after 24-9-1997 vide Notification No. 10772 [F. No. 200/77/97-IT(A-I)], dated 20-1-1999. Government has not yet increased this limit from Present 3,50,000.

Caution point

There was an expectation that limits of gratuity under the Payment of Gratuity Act would be revised retrospectively to provide parity in comparison with the enhanced gratuity received by the government employees as per the recommendations of the Sixth Pay Commission.

It is, however, important to note that these limits have not been revised with retrospective effect. Therefore, the enhanced limit under the Gratuity Act would only apply after the specified date (24.05.2010)  and the erstwhile limit would apply for the earlier period.

Conclusion from Income Tax point of view:-

  • Only Gratuity Covered Under the Payment of Gratuity Act ,1972 will be eligible for increased tax exemption limit of Rs. 10,00,000/-.
  • Only Gratuity Received Under the Payment of Gratuity Act, 1972 on or after 24.05.2010 will be eligible for enhanced exemption limit of Rs. 10,00,000/-.
  • For All gratuity received Under the Payment of Gratuity Act ,1972  prior to 24.05.2010 maximum exemption limit is only 3,50,000/-

Extract of Section 10(10)

10)    (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence services ;

(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act ;

(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month’s salary for each year of completed service [calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government] :

Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this clause  [shall not exceed the limit so specified] :

Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this clause  [shall not exceed the limit so specified] as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

Explanation.— [In this clause, and in clause (10AA)], “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule ;]

RELATED POST

1. Tax treatment of Gratuity under the Income Tax Act, 1961

2. Tax planning to be done once Exempt Gratuity Limit Increase to 10 Lakh

3. Gratuity Amount payable under Payment of Gratuity Act enhanced from Rs.3.5 lakhs to Rs 10 lakhs

4. Cabinet approved amendment to the Gratuity Act to raise the ceiling from Rs 3.5 lakh to Rs 10 lakh

5. Gratuity Limit increased to 10 Lakh as per Income Tax Act and Gratuity Act in Rajya Sabha

6. Provision for Gratuity and Leave Encashment not Allowable under the Income tax Act, 1961: IT Department

7. Payment of Gratuity (Amendment) Act, 2009 – Amendment in section 2 and insertion of section 13A, Change in definition of employee

8. Govt may raise gratuity ceiling limit for private sector employees from Rs 3.5 lakh to Rs 10 lakh

9. Lok Sabha passes bill to hike gratuity ceiling to Rs. 10 lakh from Rs. 3.50 Lakh

10. Download Payment of Gratuity Amendment Bill 2010

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

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15 responses to “Revised Gratuity Exemption Limit for employees covered under the Payment of Gratuity Act, 1972”

  1. K.Ramaswamy says:

    GR – Gazette Notification for increase in Grauity Payment from 15 days salary per year of service to 30 days salary per year already passed in both Houses of Parliament be published and become effective?

  2. K.Ramaswamy says:

    When is GR –Gazette Notification for increase of Gratuity Payment from 15 days to 30 days already passed in both houses of Parliament be published and become effective? This is long overdue. Why is the delay?

  3. sivasankar says:

    what are the companies covered under gratuity act 1972

  4. Vikramjeet Singh says:

    Gratuit and leave encashment exemption can claim one time or many time in a working life ?
    Like from A company + from B company ets

  5. Rajeev says:

    Hi, Just wanted to understand that whether 10 lacs ceiling is applicable to pvt organisation or only for govt one? What happen if employer want to pay gratuity more than 10 lacs as a gratitude to their employees ?

    Please suggest.

  6. Vada Corsey says:

    To the stage and well crafted, I appreciate for the info

  7. Nelle Rumbo says:

    I want looking through and I think this website got some genuinely useful stuff on it! .

  8. Rakesh Jain says:

    I am a director in ABC Ltd. I am also shareholder of this company more than 10%. I received gratuity of rs. 12 lacs during the year. how gratuity will be taxable? please suggest me.

  9. pozycjonowanie says:

    That is some inspirational stuff. Never knew that opinions could be this varied. Thanks for all the enthusiasm to offer such helpful information here.

  10. Pankaj says:

    Are teachers covered under the definition of worker for the purposes of Payment of Gratuity ACt 2010?

  11. Vinod Kumar Prem says:

    Will any body clarify wheather the arrears of gratuity paid in June 2010 will be taxed; if yes what would be its treatment. I retired in January,09 from PNB and got gratuity and paid tax on amount over and above 3.50 lakh.

  12. M V R Sudhakar Rao says:

    Our Organisation till 1985 was having a special gratuity rules according to which each employee who retires from service will be eligible for gratuity at the rate of one month salary for every year of completed year of service subject to a maximum of 16 and half months salary. Since April 1985 our organisation has adopted the regulations of Gratuity act. However, for the employee retiring the gratuity will be calculated as per gratuity act and as well as the rules prevailing in the organisation before 1985 and the employee will be given gratuity amount which ever works more. In such case the employee was allowed a tax deduction Rs 3.50 lakhs and balance was taxed. Now one of our official got retired from service on 30 April 2010 and his gratuity amount has yet not been paid. Will some CA may please clarify whether the enhanced exempted limit of Rs 10.00 lakhs is applicable to him at the time of settling his gratuity subsequent to 25 May 2010. Thanks

  13. CA PUNEET JETHLIYA says:

    THE LIMIT OF RS.10 LAC IS ONLY FOR GOVT. EMPLOYEES, FOR NON-GOVT. EMPLOYEES THE MAX. AMT. SPECIFIED IS REMAIN RS.3.50 LAC.

  14. Chidambar Samant says:

    Comment dated Friday, 4th June, 2010 Kassel Germany
    Tax Guru Letter dated
    I am working in TATA Motors Pune. As per section 1(3) of The Payment of Gratuity Act, 1972, it is applicable to TATA Motors. As per our wage settlements we have gratuity as quantum as follows:
    Up to 25 years- 15 days salary per year,
    26 to 30 years- 18 days salary per year &
    31 & above years of service 30 days salary per year.
    For example: – Employee “A” retires from TATA Motors. He had completed 35 years of service. His last drawn wages were Rs. 19,000/-. He had received gratuity amount of Rs. 4, 49, 423/- as per above mentioned wage settlement.
    Gratuity Calculation
    Wages per day = 19,000 / 26 = Rs. 730.77 Rs. / day
    Total no. of days to be considered for gratuity = (25years * 15 days) + (26 to 30 years = 5years * 18 days) + (31to 35years = 5years * 30days)
    = (375 + 90 + 150)
    =Total 615 days
    Gratuity amount payable
    =730.77 Rs. / day * Total 615 days
    = Rs. 4, 49, 423/-
    What about I Tax exempt gratuity in above case.
    Is it as per section 10 [10] (2) i.e.3, 83,653/-Rs. OR
    Is it as per section 10 [10] (3) i.e. 3, 32,500/-Rs.(assuming last 10 months average salary Rs.19,000/-)
    My query is about I tax exemption as per section 10 [10] (2) or (3) & why?
    Is there any CBDT Clarification on it?

  15. Chidambar Samant says:

    I am working in TATA Motors Pune.As per section 1(3) of The Payment of Gratuity Act, 1972, it is applicable to TATA Motors.As per our wage settlements we have gratuity as quantum as follows:
    Upto 25 years- 15 days salary per year, 26 to 30 years- 18 days salary per year & for 31 & above years of service 30 days salary per year.For emample:- Employee “A” retires from TATA Motors. He had completed 35 years of service. His last drawn wages were Rs. 19,000/-. He had received gratuity amount of Rs. 4,49, 423/- as per above mentioned wage settlement.
    Gratuity Calculation
    Wages per day = 19,000 / 26 = Rs. 730.77 Rs. / day
    Total no. of days to be considered for gratiuty = (25years * 15 days)+ (26 to 30 years = 5years * 18 days)+ (31to 35years = 5years * 30days)
    = (375 + 90 + 150)
    Total 615 days
    Gratuity amount payable
    =730.77 Rs. / day * Total 615 days
    = Rs. 4,49, 423/-
    What about I Tax exempt gratuity in above case.
    Is it as per section 10 [10] (2)i.e.3,83,653/-Rs. OR
    Is it as per section 10 [10] (3)i.e. 3,32,500/-Rs.(assuming last 10 months average salary Rs.19,000/-)
    My querry is I tax exemtion as per section 10 [10] (2)or (3) & why?

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