Supreme Court Ruling: How Does It Affect Gratuity Tax Exemption for Payments Before 2010?

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The maximum amount of gratuity under the Payment of Gratuity Act was increased from Rs. 3.50 lakhs to Rs. 10 lakhs via the Payment of Gratuity (Amendment) Act 2010, effective from 24th May 2010. As per Section 10(10)(ii) of the Income Tax Act 1961, gratuity calculated as per the Payment of Gratuity Act is exempt from income tax. The Supreme Court, by its order dated 13th August 2021, has held that any higher gratuity received prior to 24th May 2010 will be liable to tax, and it cannot have a retrospective effect.

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The Supreme Court's ruling on the tax treatment of enhanced gratuity received before the amendment to the Payment of Gratuity Act in 2010 is significant. Here are the key points to consider:

- The increase in the maximum gratuity amount from Rs. 3.50 lakhs to Rs. 10 lakhs under the Payment of Gratuity Act through the 2010 amendment had a retrospective effect from 24th May 2010.
- Section 10(10)(ii) of the Income Tax Act provides an exemption for gratuity calculated as per the Payment of Gratuity Act.
- However, the Supreme Court's decision on 13th August 2021 clarified that any higher gratuity received before the effective date of the amendment (24th May 2010) would be subject to taxation and cannot be retrospectively exempted from income tax.
- Employers and employees should review past gratuity payments to ensure compliance with the tax implications outlined by the Supreme Court.
- It is advisable to seek guidance from tax professionals or legal experts to address any potential tax liabilities arising from enhanced gratuity received before the 2010 amendment.

This ruling underscores the importance of understanding the tax implications of employment benefits and staying compliant with evolving labor laws and tax regulations. http://Supreme Court judgment on enh...tuity taxation