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:-
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- 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
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- 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)
if Gratuity is including in our CTC salary then company will liable to pay gratuity at the time of left the company or not.
Sir, I have working in 8 years company, now I will married coming January 2012, the company give the gratuity amount Rs.166665/- (my salary per month 20000/-)and my work continue the company. My gratuity amount is less than 3.5 lakh, this amount exempted or not, if taxable, How do calculate the gratuity amount for income tax purpose? Please guide in my e-mail ID
QUESTION: I am a pensioner from punjab State Government. I retired in jan 2008 receiving an amount of Rs. 3.5 lakh as gratuity. But I received a further amount of Rs.four lakhs in December 2010 consequent on revision of pay. At the time of my retirement the exemption limit was Rs. 3.5 lakh. is this arrear tax able in assesment yr 2011-2012
Dear Sir,
I have retired from bank in AUG’2007 Got gratuity Rs.3.67 Paid Tax on Rs 17000/- Now in 2010 Due to salary revision I got Difference of Gratuity as Rs 1.57 IS it taxable or not please guide
Sir, Here you have mentioned that for Gratuity calculation following salary part will taken under consideration i.e.
BASIC + DEARNESS ALLOWANCE
But, i would like to know that if any employee is getting his salary in below format then on which amount his Gratuity will be calculated……..
BASIC SALARY
HOUSE RENT ALLOWANCE
CONVEYANCE ALLOWANCE
please reply on my e.mail id- [email protected]
I have completed 4 years 7 months in an arganisation, will i get the gratuity.
Can company is liable to pay gratuity on expires of an employee before is completion of 5 years of services.
DEAR SIRS- MAY ANY EMPLOYER STOP GRATUITY , IN CASE OF VICTIMISED COMPULSORY RETIRMENT ON GROUNDS OF MEDICAL LEAVES(PROPERLY SANCTIONED BY COMPETANT AUTHORITY.)???
Would like to know whether Gratuity is payable to Private School Teachers serving in the state of Maharashtra and Gujarat.
Are the Private School Teachers liable to be paid Gratuity on retirement.
Dear Sir,
My mother retired from state government service (Maharashtra State). She received gratuity of 2.3 Lakh, is this gratuity taxable?
Also if we sell the pension (1/3) then whatever the amount received is it taxable?
Please reply.
Thanks & Regards
Jitendra Vairagade
SIR, WHAT IS THE LATEST TAXABLE LIMT IN GRATUITY PAYMENT NOW? PLS.GUIDE ME WITH LATEST VERSION.AND FROM WHERE CAN I DOWNLOAD THE LATEST CIRCULAR?
SIR, WHAT IS THE LATEST TAXABLE LIMT IN GRATUITY PAYMENT NOW? PLS.GUIDE ME WITH LATEST VERSION.AND FROM WHERE CAN I DOWNLOAD THE LATEST CIRCULAR?
One of my friends was asked to resign after completing 3 years in private company.
He was asked to resign otherwise, he would be terminated from service as his performance was not upto the mark.
Now my question is that instead of resigning from services if anybody was terminated by company, then is company is liable to pay Gratuity.
i have worked in mahastra as teacher for 12 years during 1958 to 1972. Am i eligible for pension from Maharashtra .
My employer(Haier Appliances Pvt.Ltd.) is deducting Gratuity in advance from my salary Package, shall i am eligible to get this gratuity, if i leave organization with in 1 year
Thanks
I was retired on 31/5/10 and a payment of Rs.1198065 received on 8/8/09 from a limted company (MNC) vide cheque dated 30/7/10.
Pl. advise me for Income tax on applicable on the above payment.
Thanks.
Ceiling limit of Gratuity payment of 10.0 lakhs from01-01-2006
What is gratuity? why it should be paid? when it should be paid? To whom it should be paid?
These are basic questions and the answer may be like this
Gratuity is an amount paid as a sort of relief to the employees at the time of separation (with 5 years minimum service) for the loyal service rendered to the employer.
The incomtax is payable on the gratuity paid which is more than 3.50 lakhs. why this limit is imposed in IT rules, may be Govt might have thought the limit of gratuity is 3.50 lakhs as per V th. Pay commission scales and the 2nd and most important is that the private sector employees may get the final payments (in collusion with employers) in the name of gratuity so that they may evade the IT from their earnings otherwise there should not be any limit on gratuity amount for exemption for IT calculations.
Once the Govt has increased the limit of Gratuity to 10.0lakhs and allowed to Govt employees it should be allowed to all employees with same effective date ie.01-01-2006.If this same limit and effective date is not same as govt employees will it not be violation of fundamental rules? Why the Govt employees are different for getting income tax exemptions from other citizens of India ?
The limit of payment of gratuity is approved by GOI only
Are the other sector employees different from enjoying the fundamental rights/rules? Perks may be different to different organisations like Govt. employees , private sector employees and PSU Company employees but income computation should be same for paying income tax for all the employees since IT is calculated on total income of a citizen why disparity? There may not be an answer.
Is Govt employee’s gratuity differs for income calculations from the employees of pvt/PSU sectors? Is the gratuity rule is different to Govt.employees
The GOI has approved the pay revision for PSU company employees in Sept 2009 which are effective from 01-01-2007 and the gratuity limit was also increased from 3.50 lakhs to 10.0 lakhs.and its effective date is also from 01-01-2007. but the arrears are paid in 2009 ( at least Govt did not deny the payment of arrears of salary revision thanks a lot)
It is very much surprising that the GOI has approved the ceiling limit of gratuity payment of 10 lakhs wef 24-05-2010 only depriving thousands of retired employees /senior citizens from getting benefit of this gratuity payment ceiling revision for IT calculations. What sin these employees have done? What is the wrong with these retired employees? God only knows
Why so disparity
Is the GOI wants this incometax money from the retired employees only,how much this amounts in the total revenue of IT department?
We the most PSU employees have to live /survive on the terminal benefits only since we are not pensioners like GOVT. SECTOR EMPLOYEES. I request the various people/associations,/Organisations to see the welfare of the old retired PSU/Private Sector employees and represent to the GOI and get the relief of gratuity limit of 10.0 lakhs exemption from 01-01-06 to avoid disparity among the Govt. employees and PSU/private sector employees and also a common rule shall prevail for all citizens of India for calculating the income Tax
Sir I am retired form pvt school from 30th Apr 2010. Am I eligible for the enhanced benefit of gratuity from 3.5 lakh to 10 lakh. Kindly give replay as i retired one day before date qwhich the school is taking into effect.
I retired from LIC of India on31st March,2010.Kindly let me know whether my retirement benefits which i received on 1st April,2010 is income for the year 2009/10 or 2010/2011.Also Income Tax is payable at the rate of 2009-10 or 2010-11 income year.Thanks
One fails to understand why there should be any ambiguity regarding tax liability on enhanced gratuity for PSU employees who got the enhanced gratuity w.e.f. 1.1.2007. The concerned clause under clause 4 of Gratuity Act 1972 stands amended and the limit has been raised to 10 lakhs. Tax treatment is covered under Income Tax Act clause 10(10)(ii) wherein gratuity payment under the 1972 Act is exempt from calculation of previous year’s income. Therefore, why can’t Tax Guru take a clear cut stand on this and why the PSU managements who deducted tax at source give the benefit of tax exemption in Form 16 to file refund claim in the tax return for the year 2009-10.
I WAS WORKING LAST 18 YEARS IN A PARTNERSHIP FIRM., BUT P.F. IS NOT DEDUCTED BY FIRM.
BUT, IF I LEAVE THE JOB THAN GRATUITY HOW WILL CALCULATE.
I WAS HEARED GRATUITY WILL CALCULATE = LAST SALARY X NO. OF YEARS
whether income tax on death cum retirement gratuity payable to U.P. Govt. under taking i.e. U.P.Power Corporation Ltd. on 01.01.2010 above Rs. 3.50 Lacs is payable
what is effective date for exemption upto Rs. 10000\-under Income Tax when we pay gratuity amount to the employee.
I would like to invite your kind attention that I have submitted duly endorsed necessary application along with necessary claim form for gratuity payment to the Principal Mont Fort Sr. Secondary School Kamrith village Ballarpur as I have worked in this school as a science teacher .
That I have joined the Mont Fort Sr. Secondary School Kamrith village Ballarpur July 1995,and got confirmation of services on 1st June 1997. I have resigned on 15-04-2009 from the services of the school for my personal reason. That I have rendered 12 years confirmed services to the organization .
As per the Gratuity Payment act 1972/ 2009 I am eligible for the payment of gratuity from the organization. Under this act government of India has already made provision for gratuity to all the employees serving in the establishment.
Kindly suggest How I shall get my Gratuity Payment .As 2010 again Gratuity amendment also passed and private school teacher are all ready covered under the definition of ’employee’ earlier it was not in the act.
pl. reply.
I am a member of this forum.
Dear Friend
Our is a R& D organisation under the administrative control of Ministry of Commerce and Industry, Govt of India. We are eligible on retirement a gratuity as per our organisation rules which is one month salary for every completed year of service subject to a maximum of 16 half months salary Or as per gratuity act which ever is beneficial to the employee.
My colleague retired on 30 April 2010. His gratuity due has not yet been paid.
Now if his gratuity is to be settled as per gratuity act or other wise (i.e., subsequent to 24 May 2010), while computing tax liability, whether the enhanced gratuity exemption limit of Rs 10.00 lakhs can be allowed.
Kindly provide the guide lines on this issue.
Regards
M V R Sudhakar Rao
i retired in march 2009 after serving 36yrs in one of the nav ratana PSU.am i get revised gratuity.
The amendment has been made effect only from 24-5-2010 whereas the 6th Pay Commission recommendations were implemented in Central PSUs. and in few State PSUs wef 1-1-07. According to the amendment, the benefit of high amount of gratuity will not be entitled for those who retired upto 23-4-2010? Is it correct and is it justice?
IT exemption limit granted by the Govt. on enhanced gratuity up to Rs.10.00 lacs is made effective from 24-05-10 only whereas the Gratuity Ceiling has been increased from Rs.3.50 lacs to Rs.10.00 lacs w.e.f. 01-01-2007 in case of PSU employees. In this case, employees retired upto April ’10 will not be eligible for the tax relief and the employees retired from May ’10 onwards are eligible for the tax relief. This is not a fair dealing and needs revision to give relief to all employees retired from 01-01-2007 onwards.
The gratuity amendment act 2010 is made effective from 24.05.2010 where by gratuity to psu and pvt sector employees is enhanced from rs 3.50 lac to rs.10 lac…suppose i receive gratuity rs 6.05 lac in sept 2009…what amount will be exempted from income tax during financial year 2009-10.pls clarify…
m c agrawal
Gratuity is exempt from Income tax upto Rs. 3.50 lakh. If an employees has received 10 lakh his balance amount of Rs. 6.5 lakh is taxable along with other income under the head salary.
So if a govt employee receives gratuity to the tune of Rs.10 lacs, then is it fully exempt?? or does it mean they can be paid upto 10 lacs ? kindly clarify..thanx in advance.
Worked in a Private company for 30 years and got gratuity amount more than the amount exempted under Income Tax Act. Is Tax payable on the balance amount i.e. on Received amount (-) exempted amount or on receivable amount?
I have completed 4 years 10 months and serving notice period in a private company. Will i be eligible for Gratuity. I will be completing 5 years shortly. Help me.
I have retired from PSU in dec 2007. At time of retirement I have received gratuaty of Rs 3,50,000/- After that from Govt of India declaration that gratuaty amount is increased to Rs 10,00,000. from Jan 2007 onwords.mr gratuity was calculated to rs 550000/-
Am I suppose to receive additional amount of Rs 200,000 as gratuaty with Tax or without Tax from the company
Read more: https://www.taxguru.in/income-tax/tax-treatment-of-gratuity-under-the-income-tax-act-1961.html#comment-13375#ixzz0mwRFAn3l
A bill has been introduced recently in Parliament to amend the Payment of Gratuity Act 1972 to raise the ceiling amount from 3.5 to 10.00 Lakhs. As the cabinet has already approved the enhancement will it not be possible for Finance Ministry/Department of Direct Taxes to issue Exemption Notification for Incometax exemption upto 10.00 Lakhs for Gratiuty payment received by retired employees.
R/sir,I have retired from M.P. State Electricity Board in November 2009. At time of retirement I have received DCRG of Rs 6,87,000/-.
As per Gratuity act the amount of Rs. 3.5 lakhs is tax free whether the govt. enhanced the ceiling of Rs.10.00 lacks fully income tax free. If excempted please sent relevent documents
Read more: https://www.taxguru.in/income-tax/tax-treatment-of-gratuity-under-the-income-tax-act-1961.html#ixzz0kVSWwvAm
I have retired from PSU in Augest 2007. At time of retirement I have received gratuaty of Rs 3,50,000/- After that from Govt of India declaration that gratuaty amount is increased to Rs 10,00,000. from Jan 2007 onwords.
Am I suppose to receive additional amount of Rs 6,50,000 as gratuaty with Tax or without Tax from the company.
Dear Sir,
I have one question if any person withdrawing basic salary Rs. 50,000/- (at the time of retirement) and no. of year worked is 30 years in pvt or ltd company then as i understand gratuity calculation is 50,000 * 15/26*30= 8,65,384/- this calculation is correct?? or any maximum cap is there of no. of year of maximum amount of gratuity (i am not taking about tax exempt)
Pls. explain
Thanks Sir
whether the gratuity ceiling raised from rs. 3.50 lac to rs. 10.00 lac is applicable to the PSU bank employees also and if yes,then what will be the date of effect of it.As i opted VRS in september 2009 whether i m entitled for revised gratuity or not?.pls clarify.
M.C.Agrawal
Read more: https://www.taxguru.in/income-tax/tax-treatment-of-gratuity-under-the-income-tax-act-1961.html/comment-page-1#comment-27513#ixzz0jEsFJYM8
whether the gratuity ceiling raised from rs. 3.50 lac to rs. 10.00 lac is applicable to the employees also and if yes,then what will be the date of effect of it.As i opted VRS in september 2009 whether i m entitled for revised gratuity or not?.pls clarify.
M.C.Agrawal
I understand that Any Gratuity Payable under the Gratuity Act 1972 ( Present Limit 3.5 lakhs ) is TAXfree under the Income Tax act. Is it correct?
Once Gratuity act is amended to enhance the Maximum Payable to Rs 10 Lakhs, is there a ned to amend Income tax act for increasing Tax exemption limit on Gratuyity also?
pls February 9th, 2010 at 5:45 pm
sir i have opted vrs from a public sector bank and was paid gratuity to the tune of rs.3.94 lac after 30 yrs and 11 months service.pls let me know the amount of gratuity exempted under income tax act and whether additional gratuity is payable to me since i am expecting the ceiling of gratuity to be revised tfrom rs 3.50 lac to rs 10 lac too public sector employees also. pls clarify.
Read more:
as below:
sir,
In recent note, that provison created for payment of gratuity will not considered at exp for IT purpose, provided if it is paid within the year itself. I hope it is correct. : then some companies are paying premium to LIC, as against their liability “group Gratuity cash accumalation scheme, will it be taken as expenses by the company, as the premium is paidon due date: this can be clarified tome please.
You say in one para ” Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax.”
In the next to next para you say ” gratuity received by the legal heir is taxable under the head” Income from Other Sources”. HOW ? PL EXPLAIN
Read more: https://www.taxguru.in/income-tax/tax-treatment-of-gratuity-under-the-income-tax-act-1961.html#ixzz0g2x14ngg
sir i have opted vrs from a public sector bank and was paid gratuity to the tune of rs.3.94 lac after 30 yrs and 11 months service.pls let me know the amount of gratuity exempted under income tax act and whether additional gratuity is payable to me since i am expecting the ceiling of gratuity to be revised tfrom rs 3.50 lac to rs 10 lac too public secttor employees also.pls clarify.
In the Income Tax Return Form, if we add gratuity income under head “salary”, then where do I add deduction of this gratuity income. Under which section ?
I am a retired govt employee, and my gratuity is expempted.
Gratuity paid to public sector employees is fully exempted or not under the income tax act 1962.
Is gratuity payable to the retired/ expired employees of Madhya Pradesh State Electricity Board (MPSEB) A Govt. of M.P. undertaking is fully exempted or not under income tax act 1962 ?