Is My Gratuity Taxable? Seeking Clarity on Possible Deductions from My Amount

Hello, as per my earlier threads, I have asked for my gratuity details. https://www.citehr.com/511442-how-mu...et-salary.html I have gained a clear understanding of gratuity calculations. Now, I want to know if tax is applicable to my amount or not. Can the company deduct tax from my amount?

Gratuity is part of a social security measure, and no tax could be deducted from the gratuity payable to an employee.

Regards

Applicable only if the total payable amount exceeds Rs 10 lakhs.

Tax Treatment of Gratuity

For the purpose of exemption of gratuity under sec. 10(10), employees are divided into three categories:

• Any death-cum-retirement gratuity received by Central and State Government employees, Defense employees, and employees in Local authorities 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. 10,00,000/-.

• 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. 10 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. 10 Lakhs.

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.

The ceiling of Rs. 10 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

Regards,
PK

Thank you, PK, for your detailed note. One of the companies is in the practice of giving gratuity to those who have not completed 5 years because gratuity is also added to the CTC.

Gratuity Taxability Query

My query is: Will gratuity received at the time of separation by those who have not completed 5 years be 100% taxable? Or should we apply the provision applicable for employees not covered in the gratuity act, thereby up to 10 lakhs getting exempted subject to the following calculations?

(Copied from your above reply: 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. 10 lakhs, whichever is less.)

Thank you,

Regards,
Raghu

Gratuity Payment Without Completing 5 Years

Gratuity can be paid even if the employee has not completed 5 years of service, as per the provisions of the Payment of Gratuity Act.

The tax treatment part has already been explained well by Mr. Jain and Mr. Govind.

Gratuity Payment for Less Than 5 Years of Service

Paying gratuity even when someone has not completed 5 years is a good gesture of the company. The Gratuity Act does not prohibit this; it only mandates it for those who have completed 5 years of service. There is no separate provision in the Gratuity Act for such cases; hence, irrespective of that, it is not taxable.

Gratuity Payment and Tax Exemption

As per the Gratuity Act, gratuity is payable only after 5 years of service, and the payment made in accordance with the Gratuity Act will be fully exempted, up to a maximum of Rs. 10 lakh.

Any payment made for less than 5 years of service will not be exempted under the Income Tax Act since it is not in compliance with the Gratuity Act, and therefore, will be taxable.

Thanks,

Vidyadhar Bhat

Income Tax on Gratuity

• When gratuity is received during the course of service

When gratuity is received during the course of service, it does not matter whether the employee is a government employee or a private sector employee; gratuity is always taxable under the head "salaries."

• When gratuity is received in the event of retirement, superannuation, or death

When gratuity is received in the event of retirement, death, or superannuation, the following cases are possible:

1. In the case of government employees (covered under section 10(10)i), the entire amount of gratuity is exempt from tax. This means that government employees do not have to pay any tax on gratuity when received in the case of death, superannuation, or retirement.

2. Private employees:

• When private employees are covered under the Payment of Gratuity Act, 1972, the amount of tax on gratuity is the least of the following three:

• a) Statutory limit of Rs 10 lakhs

• b) 15/26 * last drawn salary * number of completed years of service or thereof in excess of 6 months

• c) Actual gratuity received

• When private employees are not covered under the Payment of Gratuity Act, 1972, the tax on gratuity is the least of the following three:

• Statutory limit of Rs 10 lakhs

• 15/30 * average salary * number of completed years of service

• Actual gratuity received

Notes

1. The statutory limit applies to the gratuity received throughout the life of a person, i.e., if an employee receives a gratuity in an earlier year from a former employer and also receives another gratuity payment from another employer in a later year, then the statutory limit of Rs. 10 lakhs will be reduced by the amount of gratuity exempt from tax in any earlier year.

2. When gratuity is received by an employee from two employers in the same P.Y., the aggregate amount of gratuity exempt from tax cannot exceed the prescribed limits.

3. The exemption for gratuity would still be applicable if gratuity is received by the widow, children, or dependents of the deceased person.

Gratuity taxation policy is fair in our country and leaves surplus gratuity with the employee or his heirs for personal purposes.

Hope the position is now clear to you, Mr. Raghu. Make sure to obtain a certificate for the amount paid to you as gratuity by your employer to claim exemption.

Regards

I fully agree with your explanation mentioned above. However, if an employee receives gratuity for less than 5 years, it is not in accordance with the Gratuity Act. If the Gratuity Act applies to the establishment, and even if gratuity is paid when it is not due, it means an excess amount is received which is considered as Other than Gratuity and is fully taxable.

Your opinion on this matter would be greatly appreciated.

Thanks,

Vidyadhar Bhat

"Excess amount received, which is other than gratuity, is fully taxable." - Yes, taxable.