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Gratuity is a lump sum amount that an employee receives from a company when he leaves after serving continuously for five years. This is also one of the many retirement benefits. Furthermore, it is taxable only where its amount exceeds the Exemption Amount as calculated under Section 10(10) of the Income-tax Act.
It is calculated based on two factors: the number of years an employee completes with an organization and the last drawn salary at the organization. It is provided by the employer to the employee on completion of 5 years of service.
The employer shall pay this amount only after an individual satisfies a few basic criteria. Following are the criteria’s:
Moreover, any organization which has 10 or more employees at a given point of time shall extend this benefit to eligible candidates.
Exemption u/s 10(10) is available for this benefit received at the time of retirement/separation and for that employees has been classified into 2 categories:
The whole amount received by Govt employees is fully exempt u/s 10(10)(i). This extends to employees of both State and Central Government employees, employees from the defense sector, and those working in any local authority. For Non-Govt employees / other employees, the exemption amount depends on whether the employee is covered under the Payment of Gratuity Act 1972 or not.
To calculate the tax-exempt gratuity amount, the law divides non-government employees into two categories. Differential tax treatment is provided based on these criteria. In case this amount is received by a nominee/heir on the demise of an employee, the amount received is liable to be taxed, falling under the “Income from other sources” head.
This benefit received by an individual will be viewed as a part of his/her salary component, making it a taxable entity as per existing laws. If the employee is covered by Payment of Gratuity Act 1972- Exemption is available u/s 10(10)(ii). The least of the following is exempt from tax:
For Example:
Sr. No. | Particulars | Amount (INR) |
1 | Last drawn salary (Basic + DA) | 40,000 |
Number of years of employment | 26 (rounded off) | |
Gratuity | 40,000*26*15/26 = 600000 | |
2 | Maximum exemption allowed | 20 lakhs |
3 | Gratuity actually received | 7 Lakhs |
Amount of exemption (least of the three) | 6 Lakhs | |
Taxable Gratuity | 1 Lakh |
Note:
If the employee is not covered by Payment of Gratuity Act 1972- Exemption is available u/s 10(10)(iii) being least of the following:
For Example:
Sr. No. | Particulars | Amount (INR) |
1 | Average of last 10 month’s salary | 70,000 |
Number of years of employment | 20 (rounded off) | |
Gratuity | 70,000*20*1/2 = 7,00,000 | |
2 | Maximum exemption allowed | 20 lakhs |
3 | Gratuity actually received | 9 Lakhs |
Amount of exemption (least of the three) | 7 Lakhs | |
Taxable Gratuity | 2 Lakh |
The employer shall deduct TDS only when this amount exceeds exemption amount under section 10(10) of Income-tax Act, otherwise, employer shall not deduct any TDS.
It is payable on:
– Superannuation (or) Retirement.
– Your Resignation (or) Termination.
– Death or Disablement due to accident or disease.
– Retrenchment (or) Layoff.
– VRS (Voluntary Retirement Scheme).
Yes, if the employer makes a delay in the payment of gratuity, you are entitled to get a simple interest for the same from the due date of the payment made.
The exemption varies and depends on whether you are covered under the Payment of Gratuity Act or not. The maximum limit is INR 20 lakhs. In the ITR form, firstly enter the amount as income after deducting the exempted amount under the head Income from Salaries. Secondly, the same exempted amount to be entered in the ‘Exempt Income’ section for verification.