The government notified the Payment of Gratuity (Amendment) Act, 2010 on May 18, 2010, which increases the limit of gratuity payment to employees in the specified sectors/establishments covered under the Payment of Gratuity Act, 1972 (“Gratuity Act”). After the amendment, these employees are eligible to receive gratuity up to Rs 10,00,000, which was earlier restricted to Rs 3,50,000. Thus, crores of workers will be benefited in establishments covered by the Gratuity Act.

Meaning of Gratuity :-Gratuity refers to the emoluments received by an employee from his employer in gratitude for the services rendered. Such sum can be paid on retirement, resignation, superannuation, death or disablement. Under the Gratuity Act, the sum can be paid only after an employee has rendered continuous service of not less than five years. Exceptions being termination of employment on account of death/disablement.

Eligibility criteria:-Gratuity shall be payable to an “employee” on the termination of his employment after he has rendered continuous service for not less than five years.

  • On his superannuation.
  • On his retirement or resignation.
  • On his death or disablement due to accident or disease.

Note: However, the condition of five years of continuous service is not necessary if service is terminated due to death or disablement.

To whom is Gratuity Payable?

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.

Taxability of Gratuity

From a tax perspective, gratuity received by an employee is taxable as salaries. The Income tax Act segregates the employees receiving gratuity on the following basis:

==> Government employees;

==> Non – Government employee covered under the Gratuity Act.

==> Non – Government employee and not covered under the Gratuity Act.

Based, on the above segregation, necessary exemptions from tax can be claimed on the gratuity received.

Exemption available for employees covered under the Gratuity Act

In case of employees covered under the Gratuity Act, exemption is limited to the extent of minimum of the following:

i) Gratuity actually received

ii) 15 days salary for every completed year of service or part thereof (i.e. services in excess of 6 months will be treated as full year service)

iii) Rs 3,50,000 (the maximum limit as provided in the Gratuity Act)

The increase in limit to Rs 10,00,000 in the Gratuity Act (from the erstwhile Rs 3,50,000) in a way indicates that the tax exemption may also increase.

As per the Act, the gratuity amount is 15 days’ wage multiplied by the number of years put in by you. Here wage refers to basic salary plus dearness allowance. Take the monthly salary drawn by you last (basic + dearness allowance) at the time of resignation or retirement. Divide this by 26. This gives you your daily salary. Multiply this amount by 15 days, and further by the number of years of service you have put in.

If you have put in 10 years and seven months in an organisation, your service period will be taken to be 11 years. But if your service tenure is 10 years and five months, then for the purpose of this calculation your tenure will be taken to be 10 years only.

Take an example. Suppose that your average monthly salary is Rs 26,000. Your daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The gratuity you are entitled to after 10 years of service will be Rs 1.5 lakh.

Formula :- Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary x 15/26 x No. of years of service

Your last drawn salary will comprise your basic + DA. For computation of gratuity, your service period will be rounded off to the nearest full year.

Tax impact of the amendment

The tax impact can be explained by way of an example. Suppose, Mr A retires from a software company after servicing for 35 years and at the time of retirement his basic salary was Rs 50,000 per month.

Upon retirement, Mr A is eligible for a gratuity payout of Rs 10,00,000 and is covered under the Gratuity Act.

This example indicates that by increasing the limit, Mr A will be getting more gratuity and also a significant tax benefit.

Taxable amount of gratuity in different scenarios

Taxable Gratuity – Pre Amendment Taxable Gratuity – Post Amendment
Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 3,50,000

Least of the following shall be exempt :

1) Actual gratuity received – Rs 10,00,000

2) 15 days Salary for every completed year of service or part thereof – 50,000*15/26*35 = Rs 10,09,615

3) Rs 10,00,000

Exempt Gratuity = Rs 3,50,000 Exempt Gratuity = Rs 10,00,000
Taxable Gratuity = Rs 10,00,000- 3,50,000 = Rs 6,50,000 Taxable Gratuity = Rs 10,00,000- 10,00,000 = NIL

Open issues

There are some open issues in terms of the date from which the higher limit is applicable and whether a separate clarification/notification will come from a tax perspective. The increase in limit has got the president recently and it seems that the open issues will get clarified soon.

Conclusion

The above amendment in the Gratuity Act is a welcome step by the government and will bring lots of cheer to employees across the private sector.

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Posted Under

Category : Income Tax (28574)
Type : Articles (18564)

51 responses to “Tax treatment of Gratuity after Increase in limit from 3.50 lakh to 10 lakh”

  1. Felicity says:

    Gratuity was received from multiple employers. On superannuation, final Grat was adjusted and some portion in excess of exemption was taxed under “Income chargeable under head Salaries”, and TDS applied accdgly. Which Income figure should be uploaded into 26AS alongwith with tax TDS amt – the GRoss Gratuity or the taxable component ?
    Thanks for help.

  2. Dibakar Saha says:

    With so many people have represented for refund of TDS on enhanced gratuity from Rs 3.5 lacs to Rs 10 Lacs till 23/05/2010 , please let me know , whether Government have done anything till date?
    It is a paradox that , when Gratuity payment as per act is exempted from Income Tax , but because of the criteria of non fulfilling of certain date , some poor fellows like us are suffering

  3. ravi sk says:

    I worked in State Transport Department and retired on 31-07-2015. Now I am receiving around Rs.14.00 lacks as gratuity. I know Rs.10.00 is exempted from income tax. Further can I claim Rs.2.5 Lacks individual exemption?. Please clarify

  4. niranjan says:

    sir some one say gratuity calculated 45 days instead of 15 days

  5. niranjan says:

    sir kindly confirm if any change number of 15 days

  6. niranjan says:

    please confirm if any change no days

  7. R K Bhattacharjee says:

    We a few retired executives of Coal India have filed a writ petition before the Hon’ble High Court of Jharkhand at Ranchi praying inter-alia for modification of effective date for payment of enhanced ceiling limit of gratuity of Rs.10 Lakhs w.e.f.1.1.2007 instead of 24.5.2010 mentioned in the notification issued by Ministry of Labour & Employment,New Delhi( because it is arbitrary and goes against Art.14 of the Constitution,as similarly placed employees have been deprived of their right to get ((full ceiling limit of Rs.10 Lakhs without tax deduction w.e.f.1.1.2007.As a matter of fact,there was no co-ordination between the Ministries, as Ministry of Labour & Employment has not taken into consideration the Office Memorandum issued by Ministry of Heavy Industries,New Delhi
    for implementation of revised salary and perks by all Govt.Undertakings,for executives of Public Sector Undertakings w.e.f.1.1.2007,as per directives of President of India,including payment of revised ceiling limit of gratuity of Rs.10 Lakhs. It is needless to say that ceiling limit is always exempted from income tax,otherwise the respective govt.companies are to pay gratuity as per provision of Payment of Gratuity Act,which may be more than ceiling limit of Rs.10 Lakhs for maximum executives.That is why Govt.has issued revised ceiling limit of Rs.10 lakhs alongwith revision of salary w,e.f.1.12007. So,on one side employees have been deprived of their
    claim of gratuity as per provision of Gratuity Act and on the other hand income tax has been deducted from ceiling limit of gratuity,which is arbitrary.

  8. T C Abraham says:

    I was a cooperative bank employee retired on 30.05.2009 and received an amount of 350000 rs as Gratuity. can i file an affidavit for granting an amount of 1000000 as gratuity as per the revised law? Am i able to get this amount? If Yes/No on which grounds?

  9. Ramandeep Singh says:

    Our Employee who retired on 21-07-2006, he received his Gratuity Rs.350000 at the time of his Retirement. Now we paid them Revised Gratuity as per Sixth Pay Commission on 15-07-2013. Is the Revised Gratuity Taxable or not. If Yes then why ……………..

  10. D Saha says:

    I have been retired from a Central PSU in Feb2010 . As per terms of retirement ,I had vacated my quarter (provided by company) on 24/05/2010.On submission of vacation report my Gratuity payment becme due and finally the same was paid on during july 2010 . however tax was deducted on Rs 6,50,000/ the diff betn rs 10 lacs and rs 3.5 lacs.
    Is there any possibility of getting refund on tax deducted on this Rs 6.5 lacs.

  11. jitender kaur says:

    i got arrear of my salary after december and accordingly deposited tax. there was no columnto mention the date of receiving the arrear. incometax department has asked for interest under different sections . what should i do?

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