27th May 2010 From India, Kochi
Let us understand the provision about Gratuity as per Income Tax act and its impact:
l Under Sec 36 (i) (iv) of Income Tax Act, 1961, any contributions made by the Employer to an approved gratuity trust upto a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer.
l Impact on change in the limit Contribution funding and Income Tax
o Employers are driven by AS 15 Revised for accounting of P&L expense. However, this does not have to drive the actual contribution paid towards the benefit provision
o The level of contributions into a funded scheme would be impacted in terms of the covering the additional cost in respect of increased accrued benefit promises and the increased cost of further benefit accural
o Increase in the gratuity ceiling will result in larger benefit payment. Gratuity trusts would be required to revisit their asset allocation and make necessary adjustments to ensure sufficient level of liquidity in the fund
o Employer currently fund their gratuity scheme by ensuring the scheme is fully funded i.e asset value equals to the Present Benefit Obligation (PBO) on an annual basis. The increase in the PBO due to the increase in ceiling may result in a situation where employers may not afford to fully fund the PBO immediately.
o Under Sec 36 (i) (iv), any contributions made by the Employer to an approved gratuity trust upto a maximum of 8.33% of annual wages would attract a deduction in the hands of the employer. It is currently unclear as to whether any relaxation of this will occur post the change in the gratuity limits. Also there has been no precedence of the same in the past.
As per current Income Tax act, Section 10 (10), employees has been divided in three categories:.
1. Employee of Central/State Government and Local bodies: Gratuity received by these employees is fully exempted without any limit.
2. Employee covered under Payment of Gratuity Act: Amount as per Gratuity Act is fully exempted. Means Income Tax has not defined /set any Limit for such employees. As the income Tax Act only refers to the limit specified in the Payment of gratuity Act, these employees are fully exempt upt Rs. 10 lakhs.
3. Other employee (: For other remaining employee, limit is defined under the Income Tax act, which is at present 3,50,000. Many PSU, which is not covered under the Sate or Central Govt. definition as per 1 and 2 above, has started to pay gratuity as per Sixth pay commission with maximum up to 10 lakh. Also, private employers who pay higher gratuity benefit shall also be impacted by the change in the limit. So amount in excess of 3.5 lakh is taxable in hand of such employees. A separate notification under this sub clause [10(10)(iii)} is required to enable other employees to get tax exemption as the limit is related to date of retirement /resignation and not to date of receipt.
In past, every time, Govt. has raised this limit with retrospective effect.
Increase in Limit old History (recent three) is given below:
Exemption limit raised from Rs. 2,50,000 to Rs. 3,50,000 in relation to employees who retire/ terminated/resigned or become incapacitated prior to such retirement or die on or after 24-9-1997 (date of Notification 20.1.1999-No. 10772 [F. No. 200/77/97-IT(A-I)]
Exemption limit of Rs.1,00,000 raised to Rs. 2,50,000 in relation to employees who retire/terminated/resigned or become incapacitated prior to such retirement or die on or after 1-4-1995 ( Notification : No. SO 394, dated 1-2-1996.)
Exemption limit in relation to employees who retire or become incapacitated prior to such retirement or die, on or after 1-4-1988, or whose employment is terminated on or after 1-4-1988 (Notification: No. GSR 405, dated 28-4-1988.)
Further section 10(10) (iii) says that limit under this sub clause should be notified in accordance with limit applicable to central Govt. employees. So later or sooner the limit under this section will also be raised to 10 Lakh and the expectation is that the will be increased from retrospection effect from 01.01.2006.
Hence, the answer is that presently limit is not enhanced for "other employee" category.
7th June 2010 From India, Mumbai