Income tax on gratuity
◾When gratuity is received during the course of service
When gratuity is received during the course of service, then, 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 then following cases are possible.
1.In case of Government employees ( covered under section 10(10)i) , Entire amount of gratuity is examples from tax. This means that government employees do not have to pay any tax on gratuity when received in case of death, Superannuation or retirement.
2.Private employees:
◾When private employees are covered under the payment of gratuity act 1972 then the amount of tax on gratuity is least of the following 3:
◾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 then the tax on gratuity is 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.Statutory limit applies to the gratuity received throughout the life of a person i.e. if an employee receives a gratuity in earlier year from his former employee 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.
1.When gratuity is received by an employee from 2 employers in the same P.Y., then the aggregate amount of gratuity exempt from tax cannot exceed the prescribed limits.
1.The exemption for gratuity would still be applicable if gratuity is received by the widow, children or dependants of the deceased person.
Gratuity taxation policy is fair in our country and leaves surplus gratuity with employee or his heirs for his personal purposes.
Hope now position will be clear to you Mr. Raghu. Make sure to obtain an certificate for the amount paid to you as gratuity by your employer to claim exemption.