Tax Treatment of Gratuity as per Income Tax
Act,1961 is covered U/S 10(10) of the Act. In case of retirement,
resignation or termination, you have to consider Income Tax liability on
propose receipt of Gratuity. If Gratuity is received by employee himself, it
will be taxable under head salary while if it is received by legal heir
on death of employee, It will be taxable under “Income from other sources’ to
the extent it is not chargeable to tax as per below mentioned provision
Tax Treatment of Gratuity depends on type of employee viz;
1. Government Employee
2. Employee cover under Gratuity Act
3. Any other Employee
DownloadAll in One TDS on Salary for Govt & Non-Govt employees for F.Y.2017-18 [ This Excel Utility can prepare at a time Tax Computed Sheet + Individual Salary Structure as per Govt & Non-Govt Salary Pattern + Automated H.R.A. Calculation + Automated Arrears Relief Calculation with Form 10E U/s 89(1) + Automated Form 16 Part A & B and Form 16 Part B for A.Y.2018-19]
1. Government Employee: Any death cum
retirement gratuity received by employee of Central
Government, State Government or local authority ( Employee of statutory
corporation are not covered ) is wholly exempt from tax.
2. Employee cover under
Gratuity Act,1972 is exempt from tax to the extent of minimum of either
of below three items;
1. 15 day’s Salary ( 7 days
per season in case of employees of seasonal establishments )based on the
salary last drawn for every completed year of service or part thereof in excess
of 6 months
2. Rs. 10,00,000 ( Rs.
3,50,000 up to 23rd May,2010)
3. Actual Gratuity received
by employee
As per Gratuity Act,1972
, Gratuity shall be payable to an employee on termination of his employment
after he has rendered continuous service for not less than 5 years on his
retirement, resignation, superannuation, death, disablement due to accident or
disease. In case of death or disablement continuous service of 5 years is not
mandatory.
Employee can claim relief
under section 89 of Income Tax in case of taxable gratuity.
Meaning of Salary: For
computation of salary as per point 2(1) as mentioned above means salary
last drawn by the employee and includes dearness allowance but doesn’t include
any bonus, commission, house rent allowance, overtime wages or any other
allowance. 15 days salary can be calculated as under;
3. Any
another Employee: Any gratuity received by employee which is not
covered in above two points on termination, retirement, death,
resignation or on his becoming incapacitated prior to retirement, is exempt
from tax to the extent of minimum of either of below three items on due
or receipt basis;
1. Half month’s average
salary for each completed year of service. (Completed years include from
existing employer plus previous employer) e.g 10 years 11 months 10 days. Half
month’s average salary for 10 completed years can be considered.
2. Rs. 10,00,000 ( Rs.
3,50,000 up to 23rd May,2010)
3. Actual Gratuity received
by employee
Meaning of Average
Salary: For computation of salary as per point 3(1) as mentioned above
means salary of 10 months immediately preceding the month in which the
person retires. e.g. if employee retires on 3rd Jan,2013. An
average salary will be taken from 01.03.2012 to 31.12.2012.
Salary mean last drawn
salary by the employee and includes dearness allowance ( if terms of employment
so provide) but doesn’t include any bonus, commission, house rent allowance,
overtime wages or any other allowance. If terms of employments provide
commission for a fixed percentage of turnover achievement, same will be
included in salary.
If gratuity received by
employee from more than one employer in same financial year or different years,
agreement maximum amount of gratuity cannot exceed Rs. 10 Lacs as mentioned in
point 3(2) above.
Please note that gratuity
received during the employment do not qualify for exemption from tax. Assessee
can claim relief under section 89(1) of Income Tax Act.
