Gratuity:- Gratuity’ is a retirement benefit. Gratuity Act, 1972 act envisages in providing retirement benefit to the workman who have rendered long and unblemished service to the employer. Gratuity is a reward for long and meritorious service. Earlier, it was not compulsory for an employer to reward his employee at the time of his retirement or resignation. But 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.

Applicability of the Gratuity Act, 1972: The act provides for the payment of gratuity to workers employed in every factory, mine, oil field, plantation, port, railways, shop & Establishments or educational institution employing 10 or more persons on any day of the proceeding 12 months.

A shop or establishment to which the Act has become applicable shall continue to be governed by the Act even if the numbers of persons employed falls below 10 at any subsequent stage.

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

Eligibility criteria for Gratuity

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. In case 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.

Maximum amount payable under the Gratuity Act, 1972:-

Gratuity payable to government employees is fully exempt.For non government employee covered under Payment Of Gratuity Act,1972, the maximum limit for exemption is Rs 20 lakhs and for any other employees, the maximum limit of exemption is Rs 10  Lakhs. [Section 4(3)] [Of course, employer can pay more. Employee has also right to get more if obtainable under an award or contract with employer, as made clear in section 4(5)].

Nomination facility: – Yes, by filling Form “F” at the time of new joinee formality, each employee is required to nominate one or more member of his family, as defined in the Act, who will receive the gratuity in the event of the death of the employee.

Forfeiture of Gratuity:- The gratuity of an employee whose service have been terminated for any Act of willful omission or negligence causing any damage or loss to or destruction of property belonging to the employer, gratuity shall be forfeited to the extent of the damage or loss caused. The right of forfeiture is limited to the extent of damage.

The gratuity payable to an employee shall be wholly forfeited:

1. If the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or

2. If the service of such employee have been terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him in the course of his employment.

Applicability to contract Employee:- Yes, the only criterion is to serve at least 5 years of service at a stretch.

Calculating gratuity

a) In respect of Employees covered Under the Payment of Gratuity Act, 1972:

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.

b) In respect of Employees not covered Under the Payment of Gratuity Act, 1972:

For non-government employees, who are not covered under this Act, the manner of calculating gratuity is different. First, the average salary is calculated: for this the average of last ten months’ salary is taken (this will include the basic plus dearness allowance plus commission as a percentage of turnover achieved by the employee). Divide this average salary by 30 (ignore fractions). Now, multiply this amount by 15 and further with the number of years of service put in. Dividing the daily salary by 30 instead of 26 does put those not covered by the Gratuity Act at a disadvantage.

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

Gratuity = Last drawn salary x ½ x No. of years of service

Your last drawn salary will comprise your basic + DA+ commission on sales on turnover basis. For computation of gratuity, your service period will not be rounded off to the nearest full year. While calculating completed years, any fraction of the year will be ignored. For instance, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

Tax treatment of gratuity :- For the purpose of exemption of gratuity under sec.10 (10) the employees are divided under three categories:

1. Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees and employees in Local authority shall be exempt.

2. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972shall be exempt subject to following limits:-

    • For every completed year of service or part thereof, gratuity shall be paid at the rate of fifteen days wages based on the rate of wages last drawn by the concerned employee.
    • The amount of gratuity as calculated above shall not exceed Rs. 20,00,000/- (Limit increased to Rs. 20 Lakh with effect from 29.03.2018, earlier limit was Rs. 10 Lakh.)

3. In case of any other employee, gratuity received shall be exempt, subject to the following exemptions

    • Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service or Rs. 10 Lakhs whichever is less.
    • Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) Dated 19.06.73 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1).

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax subject to provisions mentioned above Circular No. 573 dated 21.08.90).

The ceiling of Rs. 20/10  lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

Taxable under what head:- Gratuity received by an employee on his retirement is taxable under the head “Salary” and gratuity received by the legal heir is taxable under the head” Income from Other Sources”.

Frequently Asked Question:-

QUESTION: I am a pensioner from Orissa State Government. I retired in December  2015 receiving an amount of Rs. 10,00,000 as gratuity. But I received a further amount of Rs. 1.20 lakhs in April 2018 consequent on revision of pay. At the time of my retirement the exemption limit was Rs. 10 lakh. Am I eligible for the higher exemption limit under Sec. 10(10) available at the time of receipt. The higher limit of Rs. 20  lakhs is raised by  Notification No. S.O. 1420 (E) dated 29.03.2018.

ANSWER: Every time the limit has been raised, such limit has only referred to the retirement on or after the date on which it was raised. Hence the limit on the date of retirement time would alone have to be considered, so  exemption with reference to the enhanced limit will not apply to the reader’s case. It is stated that the reader is a government pensioner. There is no ceiling for Central or State pensioners. If the reader is a retiree from the civil service of a State or held a civil post under a State or had even been an employee of a local authority, the gratuity amount, that is received, is totally exempt vide Sec. 10(10)(i) of the Income-tax Act irrespective of the date of retirement or the notification.

Further for Government pensioners maximum Gratuity amount was increased to Rs. 20 Lakh Lacs with effect from 01/01/2016 under 7th Pay Recommendations as one of the Employees Welfare Measures to compensate raising inflation over the period. Remember this is Maximum amount which they can receive as Gratuity but their is no ceiling on Tax exemption for Gratuity for Central or State pensioners.

(Republished with Amendments)

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105 responses to “Income Tax treatment of Gratuity”

  1. p k bhasin says:

    any person retired from bank on 31st august 2017 and received fratuity rs 1400000 what will be tax liabiliy

  2. Riddhi shah says:

    When retirement date is 31st December 2017 what will be exemption limit 10 lacs or 20 lacs

  3. Bhadkamkar Avinash Vishnu says:

    Which employees of non-government establishment are eligible for Gratuity? To whom The Act is not applicable? There is no salary limit under The Act.

  4. d.gopal reddy says:

    iam a central govt employee i got a commuted pension 1200000 i gave it to my friend he gave return to me will any tax levy on it

  5. sasu says:

    A PSU employee retired on 31/03/2017 and his gratuity of Rs 15 lac was paind on 01/04/2017.

    1. Should the employer deduct TDS on Rs 5 lac as per income tax rates of FY 2016-17 or 2017-18.

    2. Does gratuity become due for payment on the retirement day or the next day of retirement?

    3. If the employer has paid gratuity on 01/04/2017 and has included the gratuity amount in the income of the employee for the FY 2016-17, what can be done?

    • Sibabara Dash says:

      I retire on 31-03-2017 from private sector.
      I received Gratuity Rs 2600000 on 31-03-2017.
      Tax is exempted only for 10 lakhs .
      Now I heard that tax rule is changed to 20 lakhs exemption .Can I appeal for refund for rest 10 lakhs .

  6. S V Rane says:

    I am retired of Maharashtra state electricity distribution company , a subsidiary of a govt company named Maharashtra state electricity holding company .. MSEDCL
    is a distribution licensee for electric supply in state of Maharashtra in predefined areas. msedcl is a govt of Maharashtra undertaking .. and is a local authority as per the definition in ie act 2003 definitions. is gratuity exceeding 10 Lakh is exempted for income tax as per the definition of Any amount received by .. as per income tax act ..

  7. Vipan Handa says:

    I have retired in April 2016.Govt has raised gratuity from 10 lakh to 20 lakh. Will i get balance amount of Rs. 10.0 lakh. Govt has accepted Pay commission recomendation today.

  8. S P Ambasta says:

    Sir,
    I retired from Bank after completion of 32 yrs of service on 31.12.2013 and apart from other benefits I received Rs. 10 lacs as gratuity which was fully exempt from income tax. further on revision of salary, I received Rs. 253000/- as gratuity due to enhancement of salary. Please advise whether it will be exempted from tax or I have to pay tax on this amt.

  9. RIZZY says:

    gratuity of rs.120000 is received in august 2007 to legal hire due to death of employee aged 45 on june 28 2007 is it taxable?

  10. Rajesh says:

    hi,

    i have worked for a company on contract agreement for 18 months and later was absorbed on full-time role. the total period of service with the same employer is more than 5 years. Am I eligible for Gratuity? Thanks for any views.

    Rajesh Machha

  11. Ashwin says:

    Hi, A set of our company employees (Process) has been sold to other company. In this scenario – Gratuity has not been transferred to other company, instead the same has been paid to employees.

    1. Can this be paid through salary as a taxable component? OR
    2. If paid to employees separately – whether the same needs to be taxed and then paid?

  12. Rajesh says:

    Hi Sir,

    I was working in a company for five years.
    After resignation I received gratuity amount from my previous employer.
    Is this amount taxable for current year ?
    Or this amount is completely exempt ?
    Do I have to show this amount to current company ?

  13. Milind says:

    Sir
    I have 5Yr service in pvt school and I resigne the post so kindly send the process of gratuity how I receive and wjat os the procrdure
    pls reply as early
    thanks

  14. Piyush says:

    U will receive gratutity for 7 years if gratutity act applies to your company otherwise 6 years gratutity will be payable to you

  15. Rupal says:

    Hi,
    Gratuity is non taxable. but the statement shown in the above article as mention below says that it is taxable….

    “Gratuity received by an employee on his retirement is taxable under the head “Salary” and gratuity received by the legal heir is taxable under the head” Income from Other Sources”.

    This is absolutely wrong

    • Ameena sulthana says:

      As there is no employee employer relationship in the case of amount received by legal heir it is taxable in the head income from other sources

  16. Hemant Patida says:

    Hello Sir,
    I have been working in my last organization for 6 year ,6 month and 10 days. How many years will be consider for gratuity 6 or 7 ?

  17. Sham says:

    If I work for four years and nine months in a public sector bank and Resign to join another public sector bank, whether my period of service in the first bank be reckoned for computation of gratuity payment in either of the Banks? Both the banks are classified as “Govt. of India Enterprise”.

  18. Arwin says:

    Hi All,
    We currently follow the condition set by the PF department and calculate the Basic as Rs. 15000/- per month and PF is 12% of the basic. Due to this employees on salary bands higher than 40000 per month tend to lose out on the HRA tax exemption which would be higher if the Basic is calculated at 50% of gross and also have lower PF accumulated (also leading to lower 80C benefits). If the company increases the Basic its liability increases on Gratuity as well. As an employee I feel I pay more in taxes because of this structure. Will it possible for me to give a declaration to my company stating that I will not claim gratuity and instead ask for my basic % to be increased? Is this legally doable from the company side? Is this info available on any government website? All help is appreciated.
    Regards,
    Arwin

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