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)
I would like to meet your panel of experts and discuss with them regarding income tax exempted gratuity amount.
I have with me various case studies.
With Regards
Chidambar Samant
I have retired for PSU on 31.08.2017
I have receiver Gratuity Rs 10,00,000/ on 31.08.2017
Now, my gratuity become payable Rs 13,57,797/-due new pay revision as on 02.08.2018
Is there will be Income Tax on a difference of Rs 3,57,797/-
Please give your advice on this
any person retired from bank on 31st august 2017 and received fratuity rs 1400000 what will be tax liabiliy
When retirement date is 31st December 2017 what will be exemption limit 10 lacs or 20 lacs
GRATUITY UPTO RS. 20 LACS IS TAX FREE.
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.
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
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?
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 ..
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.
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.
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?
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
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?
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 ?
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
U will receive gratutity for 7 years if gratutity act applies to your company otherwise 6 years gratutity will be payable to you
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
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 ?
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”.
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
I want to quit from my job, but gratuity will not calculate on over time amount. So please reply whether it has been on it or not.
about gratuity sir, i am working in private organisation i want to resign on jan-15, upto jan-2015, my service will compleate 5 years i will be able to receive gratuity or not
sir,
in my company Vrs Declaired. The depoisted amount stright way to my bank.
here my quetion is that
1 how much the tax ratio i have to pay for VRS amount
2. How much the tax percent i have to pay for gratuity
plz clear it. it is a big problem now in my company
Hi !
I am about to retire from Reserve Bank of India on 31st March,2015.Kindly let me know whether my retirement benefits which I will receive on or after 1st April,2015 is income for the year 2014/15 or 2015/2016.
Is gratuity received by LIC Agents is taxable
I am a finance executive in a project called cebpol funded by Norway and Moef
I have to calculate TDS of 5 employees who have joined recently on 1/8/2014
I want to know whether TDS has to be calculated permonth taking their previous salary or simply start calculating from the month of August.Also I want to tell there are 3 employees who receive same salary and two other employees who receive a higher salary .want a detailed working of TDS of these 5 employee Take salary as 70000 and 40000
I got gratuity amount 109590/- in Jan 2014. Tax is not deducted as per form-16. Do I have to pay income tax for this amount?
Are there any slab for gratuity amount for income tax exemption?
I was employee of A PSU and had served for 24 years before resigning in March 2014.
The PSU has approved policy of re employment on same pay that was last drawn after settlement of all dues like Gratuity and Leave encashment being fresh appointment.
I have applied for the same, however the PSU wants me to surrender the Gratuity paid to me be surrendered with Interest, though against policy.
Till such time I give this undertaking the application for re employment is not being forwarded.
Returning back the gratuity then would legally mean that the services rendered before resignation would be continued and seniority will be continued.
This is because if some thing happens to me in first five years then the Company is liable to pay me back entire gratuity and not deny anything based on gratuity act that I have not served for more than 5 years to be entitled for such gratuity.
Am I correct in this interpretation and should give an undertaking to repay gratuity and then take legal recource- as this in my benefit that my services would then be counted.
Please guide.
Shriniwas
sandip saraopi
only gratuityy
hi
for Expert advice & material solution
Hi,
My gratuity calculation is as below on leaving my company:
Gross Amount : Rs.11585/-
Tax : Rs.3580/-
Net Amount Credited : Rs. 8005/-
I want to ask why this tax component is included here. How tax on gratuity is calculated?
Thanks for reply.
I have received my gratuity for 9 years calculated on Gross as company doing this is for every one. I am receiving Rs.3,37000.00. Now auditor saying it will be taxable since gratuity is on higher side please advise me.
Do I have to bear tax or company shld pay the same.
As on my contract “You will be entitled to gratuity as per the Payment of Gratuity Act. 1972.
Please advise at the earliest as I have accept or raise my quirey by 05/15.
Thanks a lot in Advance
Anil@ you are not eligible for gratuity as per the relevant provision.
Sir
I have joined the company 8th July 2008 and and resigned on 29 June 2013. Its 9 days less than 5 years. Please suggest that I am eligible for gratuity or not.
I have completed 14.3 yrs service and retired at age 60. My basic salary was 37700 p.m. My company pays 1 month’s basic as gratuity for every completed year of sevice. The amount that I will receive is about 527000/- Is this amount exempt or taxable under present law and if so how much please let me know asap.
Thanks.
Sir, my monthly gross pay consisted of 1) Salary 2) House Rent Allowance 3) Post Graduate Allowance and 4) Variable Allowance. It was also included in the contract that the company would contribute towards PF @12% of the deemed basic calculated as 60% of Salary. Otherwise, there was no mention about any Basic in the contract. This contract was signed in January 2011 (I started working in this company in October 2001 and left in April 2012, in total 10 yrs 7 months).
I think that the gratuity should be computed based on the Salary which is clearly mentioned in the contract. Regarding gratuity the contract says “The gratuity payment shall continue to be governed as per payment of Gratuity Act.”
On the other hand, if the basic is considered the same as that is mentioned in connection with PF, the Minimum amount of gratuity should be as shown below:
Minimum Gratuity = Basic (60% of Last month’s Salary) x 15/26 x Period (11 yrs, as rounded value of 10.58 yrs). However, the amount I have received is 73% of this Minimum Gratuity (only 44% if Salary is considered).
As clarification, I was replied that their computation was based on some basic. I argued that since my contract included a payment under the head “salary” gratuity should be computed based on this Salary or at least on the basic indicated in the contract in connection with PF.
I will appreciate if you would kindly tell me which one is correct.
BTW the PF deduction from my gross monthly pay was only around 1.58% of the Salary instead of 7.2% (12% of 60% of Salary) as per the contract. I think the amount of PF received is also incorrect.
Since I have already raised my dissatisfaction on the amounts received and in return received a reply which is not convincing, please tell me what should be my next step if I was not paid the right amount – request the company to review it once again or go for legal action. Besides, I was deprived from so many other things verbally promised.
Thanks in anticipation.
Hi,
I resigned from my previous organisation after service of around 12 years.
I received gratuity and pension as my final settlemeent. However in form 16 same is shown part of my taxable salary. My questions are: –
– Is gratuity taxable? If not then how to show same to get exemption in ITR2.
– Is the pension taxable? This is different from PF-Pension and is carryforward of fund from the pension scheme that organisation had in early days. Later they broke this corpus and placed a portion of it with ICICI Prudenctial.
– Also please let me know if property tax can be claimed for exemption.
– I have some short term gains for intraday trades. So can I go with ITR2 or in need to choose a differnt form.
Thanks,
Ashish
i left job in july-2012 and than joined on November-2012 , is that i need to pay tax. salary is in the slab of tax payer
I have resigned from an organisation after serving 12 years and received full and final settlement along with gratuity. No TDS deducted from gratuity payment. I have joined another branch of the same organisation (having same PAN & TAN) without any break. I want to know whether gratuity received by me is taxable or not. Here, organisation is same but different branches. For clarity, I resigned from branch-1 and joined branch-2 of the same organisation. Whether gratuity received from branch-1 is exempt or not.
Thaks
Hi Sir,
I am working in software concern which is a partner ship one and has more than 25 employee, since April 2007.
In my offer letter they have not mentioned about Gratuity Payment. I want to know whether am I eligible for Gratuity.
Thanks,
Muthukumar
Nice
Thanks!! it helped me a lot. It is highly appreciated.
Dear Sir/Madam,
I wanted to know how much amount of gratuity I will receive from my company (a private company in India) and I would like to let you know that I have completed my 5 yrs, 7 months and 14 days with my private company.
The gratuity amount will be calculated on 5 yrs or 6 yrs. in my case. Please reply ASAP.
Thanks & Regards, Suresh Verma (+91-98 183 949 37; [email protected]; [email protected])
IS gratuity transfer from one unit to another unit of same employer
hi
Estate manager who appoint in 2002 for one year contract and contract renew every year at salary Rs.23000/- per month lump sump. and now after ten year in 2012 he resigned. let me explain whether he entitled for gratuity or not
My Mother retired as a teacher from a private school in November 2011 after 30.5 years of service. The school refuses to pay gratuity stating private schools dont need to pay gratuity . My question is1. Can I approach the school with Amendement act of 2009 wherein Employee definition includes teachers and 2. Her gratuity amount is more than 3.5 lakh so is she eligible to claim that amount as the ceiling now is 10 lakhs?
If an organisation has it own set of rules past 10 years back that they will pay gratuity for continuous 10 years of service. it is a small organisation and dont have enough money for pay gartuity so they made like this. but the organisation change according to the time and adopt a new rule of gratuity for 5 years of continuous service. can the employee who work 5 years in the time of old rules can ask the gratuity for 5 years of continuous service ?
If an employee has worked in a private organisation for 4 years and 8 months, Will he/she be eligible for gratuity?
Please clarify i was worked with HDFCBANK for 8years and 10 months as a contract employee.After every two year they renewed my contract for two years.I joined the bank on 16 Jan 2003 and worked till 30 Nov 2011.As per the Gratuity act1972 for its applicability to contract employee says:The only criterion is to serve at least 5 years of service at a stretch which i did it.I am asking for my gratuity which they are not paying to me.Please help.
Please clarify if the employers in private sector can pay the actual amount of gratuity if it is more than Rs. 10.00 lacs, say Rs. 17.00 lacs if the employee agrees to pay the income tax on the excess amount of Rs. 7.00 lacs.