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.
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:-
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 ;]