Gratuity Ceiling: Can Companies Pay More Than the Rs. 3.5 Lacs Limit?

Dear all,

I have a question...

Gratuity maximum ceiling is Rs. 3.5 lacs. Can the organization pay beyond that?

Hi,

Please go through this information, which is according to the income tax department. Maybe this can help you.

Gratuity (Sec. 10(10)):

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

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

(a) 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.

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

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

(a) 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.

(b) 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.

As per Board's letter F.No. 194/6/73-IT(A-1) dated 19.6.73, 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 (Circular No. 573 dated 21.8.90).

Regards,

Himani

Dear Gaggan, Amith & Himani,

Hi,

It is true that as per the Gratuity Act, the maximum amount of gratuity may be Rs. 3,50,000/-. If any employer wants to pay more than this amount, that will be treated as Ex-Gratia, not as gratuity. An amount only up to Rs. 3,50,000/- will be treated as gratuity for compliance with the Gratuity Rules.

Hope this will solve your query.

Regards,
AMIT KUMAR TAWAR

There is absolutely no restriction on organizations willing to pay Gratuity beyond the prescribed amount under the Payment of Gratuity Act. However, any amount paid to an employee beyond Rs. 3.5 lakhs will be included in his income for the deduction of tax. For example, if an employer pays Rs. 7 lakhs to an employee, Rs. 3.5 lakhs will be included in his income for the purposes of the deduction of Income Tax at source.

K.S. Venkatachalam
Management Consultant

Hi Himani,

Could you please help me find out what the eligible gratuity was as of 1-4-1996 and the subsequent changes needed to increase it to 3.5 lakhs?

Thank you.

V S Sudhaker

Right. I also want to corroborate the fact that I recently received my gratuity settlement. I was eligible and paid gratuity that was definitely more than 3.5L.