Understanding Gratuity Act: Exemptions, Ceiling Limits, and Tax Implications

Can anyone please confirm if the employee has served two different companies with more than 5 years of service and if the employee has already received Rs 3,50,000/- as exempted amount from the earlier company as per the Payment of Gratuity Act. Can he still claim Rs 10,00,000/- as per the new amendment and get full exemption, or should we give him/her the exemption up to the tune of Rs 6,50,000/-?

Dear Nitin Borhade,

I don't know the correct answer for the above query. But as per section 4(5) of the Payment of Gratuity Act, the employer can pay in excess of the ceiling limit.

Abbas.P.S

Thank you for the update. My question is, can we give an exemption of more than Rs 1,000,000 in total? The individual has already claimed Rs 350,000 from their previous employer. Can we now provide an exemption of up to Rs 1,000,000, or is the ceiling limit for the entire year Rs 1,000,000?

In this scenario, the employee is confirming that they have already received Rs 350,000. Will the employee be eligible for the full exemption of Rs 1,000,000, or should it be restricted to Rs 650,000, with the remaining Rs 350,000 being taxable?

Nitin Borhade,

I shall quote TAXGURU on Income Tax exemption of gratuity amount as under:

"Tax treatment of gratuity: For the purpose of exemption of gratuity under sec.10 (10) the employees are divided under three categories:

Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees, and employees in Local authority shall be exempt.

Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to the following limits:

For every completed year of service or part thereof, gratuity shall be paid at the rate of fifteen days wages based on the rate of wages last drawn by the concerned employee.

The amount of gratuity as calculated above shall not exceed Rs. 3,50,000/- (w.e.f. 24.9.97).

In the case of any other employee, gratuity received shall be exempt, subject to the following exemptions:

Exemption shall be limited to half-month salary (based on the last 10 months average) for each completed year of service or Rs. 3.5 Lakhs, whichever is less.

Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 3.5 Lakhs.

The exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1). Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax subject to the provisions mentioned above.

The ceiling of Rs. 3.5 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years."

Note: The above information is dated 8.11.2009. At that time the ceiling limit was Rs. 3,50,000. In May 2010, it got enhanced to Rs. 10,00,000.

Abbas.P.S