Is My Gratuity from a Previous Job Taxable? Seeking Clarity Amid Conflicting Info

I have received gratuity from my previous employer (let's say x) recently. I worked with my employer (x) for 4 years and 9 months. My salary CTC with my previous employer (x) did not include gratuity as a component of CTC. I mention this because my current employer (let's say y) includes gratuity as a component of CTC.

Queries Regarding Gratuity

I have some queries:

1. Is this gratuity receipt taxable?

I kindly request you to share your expert opinion supported by relevant citations, sections, or examples. The reason I ask is that I have already conducted extensive research on Google and read forums. However, I still find conflicting information where some sources mention it is exempt, while others say it is not exempt or exempt if under the Payment of Gratuity Act, etc.

Understanding Gratuity in CTC and Tax Implications

Gratuity is included by many in CTC as the employer is supposed to deposit some amount year on year in an account. Gratuity becomes claimable by an employee only after he/she serves a minimum period of 5 years with the company (without any break).

To know more about the Gratuity Act, please read the topics and discussions found on the sidebar. Gratuity that one receives is tax-free up to ₹10 lakhs. Any amount received as gratuity post ₹10 lakhs is taxable.

So, for example, if you are now working with Y and serve them for the next 6 years, your gratuity will be calculated and given to you with your F&F. The calculation is - 15/26 * 6 * Last drawn salary.

For instance, if by this calculation, you are to get ₹10.5 lakhs (just an assumption to show you taxability), your ₹10 lakhs gratuity will be fully paid, and ₹50,000 would be added to your taxable income, and tax is accordingly worked out. TDS is deducted, and thus the amount is paid. Hope this clears your doubt.

Gratuity Taxation Clarification

Gratuity is not taxable like other pay. There is no doubt about it.

Dear Sunandoghosh / Ankita,

There is another very important clause that states, "Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt from Income Tax under sec. 10 (10) of the IT Act only if the employee receives gratuity for every completed year of service or part thereof at the rate of fifteen days' wages (based on the rate of wages last drawn)."

If the employer is paying more than the calculated amount (Last drawn Basic * 15 days * No. of service in years / 26), then the exceeded amount is taxable.

Exemption is available if the employee receives gratuity as per the above calculation (Last drawn Basic * 15 days * No. of service in years / 26) or Rs. 10 Lakhs, whichever is less.

Regards,
Kamal

Understanding Gratuity in CTC

First of all, there is no concept of gratuity being a part of CTC. This practice is started by companies just to inflate CTC to show employees that they are giving more. The catch here is that it is never your money to claim unless you are eligible under the Gratuity Act.

That said, no tax is imposed for amounts under Rs. 10 lakhs under the Act. At the same time, even the employer is not compelled to give gratuity of more than Rs. 10 lakhs. If they do, then it's the employee who benefits, and if they do not, then the employee cannot complain.

Ankita has given you the right advice in this matter, and you should have no doubts whatsoever henceforth.

Regards

You need to understand Section 10(10) of the IT Act, which states that "any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of subsections (2) and (3) of Section 43 of that Act," is exempted from income tax. If the employer is paying more than prescribed in the Payment of Gratuity Act, the exceeded amount is taxable.

For example, if the basic + DA is ₹50,000 and the total years of service are 20 years, then as per the Payment of Gratuity Act, the calculated gratuity amount is ₹5,76,923. If the employer pays ₹7,00,000 as gratuity, then ₹7,00,000 - ₹5,76,923 = ₹1,23,077 will be considered as salary and is taxable. Gratuity received in excess of the minimum amounts as prescribed in the Payment of Gratuity Act will be included in the gross salary for the purposes of taxation.

I appreciate your effort in clarifying this point as it will help many freshers/executives in HR departments. I had not mentioned this aspect simply because it is an accepted belief that anyone who knows gratuity will know that the company will first calculate what is actually due, and rarely a company pays more than what is due to the employee. However, I have seen in some cases of senior management executives that, to sweeten the deal (at the time of appointment), the management, in order to retain the employee for a minimum certain period, promises to pay an extra amount which is ex-gratia but is inappropriately termed and clubbed with gratuity.

Tax Implications of Gratuity

My emphasis was on the point that if the amount of gratuity, which is calculated, exceeds Rs. 10 lakhs, as you rightly said, the amount is taxable beyond Rs. 10 lakhs. However, in my opinion, any amount paid over and above the actual eligible gratuity calculated to any employee cannot be termed as gratuity. Taking your example to illustrate:

"Suppose basic+DA is 50,000 and the total years of service is 20 years...then as per the Payment of Gratuity Act, the calculated gratuity amount is Rs. 5,76,923.

In this case, if the employer pays 7 lakhs as gratuity, then 7,00,000 - 5,76,923 = Rs. 1,23,077 will be considered as salary and is taxable."

Here, Rs. 5,76,923/- is GRATUITY & Rs. 1,23,077/- is NOT SALARY or gratuity; it is termed as EX-GRATIA and is taxable.

I hope this helps many here to understand the difference.

I think there is a ceiling limit for Gratuity, i.e., Rs. 3,50,000/-. Am I correct?

Gratuity amount may have a ceiling amount, i.e., Rs. 3,50,000/- maximum. Please check once again.

When you receive a gratuity of Rs. 10,00,000/-, it is not taxable. If it exceeds 10 Lakhs, it becomes taxable.