Can We Avoid Tax on Gratuity if Our Company Closes Before 5 Years of Service?

I am working in a US-based MNC in Hyderabad, and due to a business change, the company is planning to close their India center. The company was withholding 4.81% of our basic as Gratuity. Since the company is closing its India center, they are giving gratuity based on a calculation of 4.81% of the basic salary multiplied by the number of months worked in the company, even if the employee has not completed 5 years of service with the company.

My questions are:
1. Is the Gratuity Act of 1972 stating anywhere that an employer can't pay gratuity for less than 5 years of service?
2. Are the income tax rules stating anywhere that one is supposed to pay tax on gratuity if the employer provides it for less than 5 years of service?

In our case, are we supposed to pay tax on it or not?

Regards,
Sanjay

10 views, no reply. Dear friends, please reply. Our employer wants to pay gratuity without tax, but the payroll agency wants to deduct tax.

Regards

Dear Sanjay,

The Gratuity Act does not prohibit any employer from paying gratuity even before 5 years. All acts are designed to establish a bare minimum, and any employer can extend the facility for the benefit of employees.

Gratuity is taxable whether paid after five years or before five years, but it is not taxable upon superannuation.

Thanks,
J. S. Malik

Dear [Recipient's Name],

Sorry for the earlier thread. Gratuity is not taxable if paid as per the Gratuity Act. In your case, it will be taxable.

Thank you,
J.S. Malik

Dear sir,

It is not clear to us why our case is not under the gratuity act. Could it be due to a term of less than five years? I checked with my HR department, and they confirmed that our company falls under the gratuity act. So, why is the payment not covered by the act?

Thank you.

1. Yes, the company can pay gratuity before completion of 5 years of service by any or all of its employees.

2. However, I am afraid the entire amount paid as gratuity before 5 years will be taxable.

Regards,
Raj

Dear,

You have been paying before five years, whereas the Gratuity Act states applicability after five years. You can pay, but it will be taxable.

Thank you,
J. S. Malik

Gratuity paid in excess of Rs. 3,50,000 is taxable. Up to this amount, it is not taxable as per the law. But in your case, since you are paying the same before a 5-year duration, it would be taxable in the hands of the employee.

Dear All,

Gratuity paid up to Rs. 3,50,000 in a lifetime is exempted from tax. Anything above that amount is taxable. There is no question of whether the amount of 3.50 lacs he is getting in his first employment or others. At the time of joining, take a declaration from the employee about the gratuity amount he has received from his previous employer. It will be his responsibility to declare the authentic information.

If he has received 3.50 lacs in the previous employment and has obtained an exemption on it, charge tax on the gratuity paid by you. Otherwise, provide him with the benefit in your employment.

Nitin Nikam Advocate

Actually, as per the CTC concept followed in most organizations, contribution towards gratuity is also included in the computation of the CTC. However, if an employee leaves the company before completing 5 years of service and the deduction is specified in the CTC, the company will pay the amount to the employee as ex gratia, which will be taxable.

Seniors, please suggest if I am wrong.

Regards,
Mradul Bhatnagar

Dear Friends,

Thanks for your reply. After discussing with one or two law firms, my company decided to pay it as tax-free. The law firm informed them that the company can pay gratuity for less than 5 years of service as per the Gratuity Act of 1972. (It's not explicitly stated in the Gratuity Act that gratuity will be taxable or tax-free.)

Income Tax Rule of 1962 states that if one receives gratuity, it will be tax-free up to a certain limit (not more than 3.5 lakhs, etc.) Under the Income Tax Act, it is not specified that one must complete 5 years to receive tax-free gratuity. Therefore, if the company is making any payments under the head of gratuity, it will be tax-free. However, the tax-free limit should not exceed the income tax rule.

If the company wishes to deduct tax, then they should categorize it as other earnings, not gratuity. The tax-free limit of 3.5 lakhs is applicable for a lifetime. If one has utilized 1 lakh of the tax-free limit, they can avail a maximum of 2.5 lakhs in the future, not another 3.5 lakhs.

Dear Friends,

Thank you for your reply. After discussing with one or two law firms, my company has decided to pay gratuity as tax-free. The law firm informed them that the company can pay gratuity for service of less than 5 years as per the Gratuity Act of 1972. (It is not stated in the Gratuity Act whether gratuity will be taxable or tax-free).

The Income Tax Rule of 1962 states that if one receives gratuity, it will be tax-free up to a certain limit (not more than 3.5 lakh, etc.) under the Income Tax Act. It is not mentioned that one must complete 5 years to receive tax-free gratuity.

Therefore, if the company is making any payment under the head of gratuity, it will be tax-free. However, the tax-free limit should not exceed the income tax rule. If the company wishes to deduct tax, then they should categorize it as other earnings, not gratuity.

The tax-free limit of 3.5 lakh is applicable for a lifetime. So, if one has utilized an advantage of 1 lakh, then in the future, they can avail of a maximum of 2.5 lakh and not another 3.5 lakh.

Regards,
Sanjay