New Amendments To Gratuity - CiteHR
Umakanthan53
Labour Law & Hr Consultant
Rdsyadav
Educator, Management Consultant & Trainer
Kumaran Praveen
Hr-executive
Raj Kumar Hansdah
Shrm, Od, Hrd, Pms
Hotgautam
Hr Manager
Anil Akuri
Human Resource

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Dear Seniors,
I understand through someone that now employee has to pay tax of 30 % to Gratuity amount whether it is less than 10 L slab or above the 10 L slab. Looks like recently government (six months back) had amended this rule. If anyone has any idea on this please share.
I have searched for this amendment copy online / citehr but no information is available on this case.
Thanks for your help.
Thanks,
Anil
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Hi Buddy, There is no any amendment for the said matter as far as my knowledge goes. With Regards Mr.Thumbs Up
Dear ANIL,

Though your query is restricted to the taxable limit of gratuity in particular, I think it would not be out of context to throw some basic information on taxable limits of terminal benefits in which gratuity is also one. So let me give them below in nutshell as far as I know:

The terminal benefits normally received by employees on retirement are taxable under the head of "salaries" as "profits in lieu of salaries" as provided u/s 17(3) of the Income Tax Act. However, exemption is available from taxation in respect of some of the terminal benefits under section 10 of the Income Tax Act either wholly or partly as detailed hereunder:

[ A] GRATUITY - Sec.10(10):

(1) Any Death-cum-Rteirement Gratuity received by the employees of Central and State Governments, Defence Services and Local Authorities.

(2)Any gratuity received by persons covered by the Payment of Gratuity Act,1972 subject to (a) at the rate of 15 days salary last-drawn for every completed year of service (b) not exceeding Rs.10 lakh.

(3)In case of any other employees -(a)the calculation shall be limited to half month's salary based on the last 10 months average for each year of completed service or (b) Rs 10 lakh WHICHEVER is LESS.

However gratuity received by an employee on his resignation also gets qualified for exemption u/s 89(1) of the IT Act subject to the above conditions. Similarly gratuity payable in respect of a deceased employee to his widow or legal heirs is also exempt.

[ B ] COMMUTATION OF PENSION:

(1) The commuted value of pension in respect of the employees of Central and State Governments, Defence Services and of the Corporations established under Central or State Acts.

(2) In respect of any other employees who are in receipt of gratuity, commuted value of one third of the pension is exempt.

[ C] ENCASHMENT OF LEAVE:

(1) Encashment of leave during service is fully taxable.

(2) Encashment of Earned Leave on retirement of employees of the Central and State Governments is fully exempt.

(3) In respect of any other employees, it is limited to THE LEAST of (a) 30 days salary per year of completed service (b) 10 months average salary (3) encashment actually received ( Rs.3 lakh for retirement after 02-04-1998).

(4) Encashment of Privilege Leave to the legal heirs of deceased employees is not taxable.

[ D ] Accumulations of PROVIDENT FUND: Fully exempt.

[ E ] Sums received from Any Approved SUPERANNUATION FUND is fully exempt.

[ F ] RETRENCHMENT COMPENSATION:

Retrenchment Compensation @ 15 days last drawn salary/wages is exempt from tax subject to a limit of Rs.5 Lakh.
we pay gratuity @15 day salary for each completed year of service up to 30 years and @26 days salary up to retirement. we deduct income tax for gratuity earned beyond 30 years even if total gratuity paid is less than 10 lakhs. Are we right in doing so?
Dear Gautham,

Your query pertains to a peculiar situation wherein the scheme of gratuity contemplated under the Payment of Gratuity Act,1972 is clubbed with your own scheme of gratuity under the Contract of Employment in cases where the length of service crosses a certain limit. I think that it is certainly a better term of gratuity under the contract of employment and as such it can not affect the right of an employee to it as per the saving clause u/s 4(5) of the PG Act,1972. In such a case, therefore, the ceiling on the amount of gratuity imposed u/s 4(3) becomes inoperative.

Now, coming to the question of taxation, taxability of the amount of gratuity is relaxed up to a certain limit is based on the recognition of the principle that it is a lump sum paid only once to the employee on the termination of employment beyond certain no of years of blemishless service. Since Sec.4(5) permits the right to get better terms of gratuity under an award or agreement or contract with the employer, the relaxation of taxability does not get completely extinguished but remains to the ceiling only. To put it otherwise even if the method of calculation for gratuity is different from what the P.G Act prescribes, taxability arises only when the amount of gratuity thus arrived exceeds the ceiling for the reason that the method of calculation does not alter the status of gratuity of being a one time- terminal benefit.

In the light of my foregoing observations, I am of the considered opinion that deducting income tax from gratuity earned beyond 30 years when the total gratuity paid is less than Rs.10 lakh is not correct.
Hi, Gratuity amount less than Rs.ten lacs is non taxable rightly explained by our learned colleague Mr Umakanthan. So under the definition"taxable Income" exclusion provision is there that Gratuity to a relaxed limit is permitted. You should stop deduction of income tax as opined above else you will have legal cases of recovery of dues from outgoing employees against company.
Best wishes,
RDS Yadav
Labour Law Adviser
navtaranghrs@gmail.com
Dear hotgautam
Your Company should immediately return the recovered amount to the retired employees.
In future, it should be ensured that such unauthorized and illegal deductions in the name of Income-Tax should not be done.
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