Gratuity for 58-Year-Old Retiree with 4 Years of Service: Taxable or Not?

Dear all,

I have one query related to gratuity:

1. An employee retired at the age of 58 years.
2. He completed 4 years of service in a private limited company.
3. If he is entitled, would it be taxable or non-taxable?

Reply and suggestions, please.

Regards,
Sumit

Sorry, but that is allowed only in the case of death or disablement. In the case of superannuation, 5 years are mandatory. Check this to know if you are eligible or not: [Indian Labour Laws & Shram Suvidha Simplified](http://www.shramsamadhan.com)

Dear Sumit,

Section 4 of the Payment of Gratuity Act, 1972 provides that gratuity shall be payable to an employee on his superannuation, retirement, or resignation after completing continuous service for not less than five years. Since the employee has not completed the mandatory period of five years upon retirement, he shall not be entitled to the payment of gratuity under the Act.

BS Kalsi,
Member since August 2011

Eligibility for Gratuity

All suggestions are correct. However, I have a small suggestion regarding the eligibility for gratuity. If an employee completes 5 years of service without any absences or breaks in service, they are automatically considered eligible for gratuity. But what happens if an employee has not completed the full 5 years of service? For instance, if an employee completes 4 years and 10 months of service, what would happen?

According to the Industrial Disputes Act, if an employee completes 240 working days in a year, they are eligible to receive all employment benefits as per the law. In such a scenario, an employee who has completed 4 years and 240 working days of service would be eligible for gratuity.

It is important to note that tax on gratuity is not applicable. Our trust is here to clarify any queries you may have.

240 days are for organizations working 6 days a week; for those working 5 days a week, it is 190 days. Please verify the definition of continuous service.

Dear Prathap,

There is no doubt that your contention is correct for the cases where an employee has completed 4 years and 10 months. The Madras High Court has also favored your contention, but sorry to say that the instant employee has completed only four years, as mentioned by Sh. Sumit in his post.

BS Kalsi, Member since August 2011

When not eligible for gratuity after merely 4 years of service, when does the question of income tax arise? Even if eligible after qualifying service, is the gratuity exempt from income tax?

Hi Sumit,

If the employee has completed 4 years and 8 months of continuous service and reaches the retirement age, then they are eligible to receive gratuity under the act. If this period is not completed as required, the employee will not be able to claim gratuity. No tax is applicable to gratuity claims.

Regards,
Anesh
Manager HR

Gratuity Eligibility and Payment

As mentioned, the employee retired at the age of 58 years on superannuation after serving for 4 years. It is clear to the management that the individual will be due for retirement after 4 years and will not be eligible for the gratuity payment since it falls due on completion of 5 years of service.

If the gratuity subscription (4.81%) of Basic was shown as part of the CTC, then the amount can be paid because it was well known in advance that the individual would not be eligible for gratuity upon retirement. If it was not part of the CTC, then there is no need to pay.

Hi Kalsi,

I understand the content of the query raised by Mr. Sumit. I appreciate your valuable advice in this regard. Meanwhile, Mr. Sumit has queried that the employee completed his 4 years of service upon retirement. However, there is no specific duration of service communicated. Hence, I have explained both conditions of eligibility.

Thanks,

Prathap Kodaganti

Have you read the definition of 'continuous service' under the act? Please read it, and then put forth your point, if any.

I agree with Sh. Shrikant that instead of quoting the ID Act for the calculation of 240 days, you should have read the definition of "Continuous Service" given under Section 2A of the Payment of Gratuity Act, 1972 itself.

I have confined my reply to the query initially raised by Sh. Sumit, but you have given another twist to the ongoing thread by mentioning what would happen if an employee completes 4 years and 10 months of service. In such cases, we mostly refer to the judgment of the Madras High Court, which has allowed relief to such employees.

Regards,
BS Kalsi

Prathap Kodaganti,

A copy of the Madras High Court is attached herewith for your ready reference.

BS Kalsi,
Member since August 2011