Gratuity [Section 10(10)] :
1. Retirement gratuity received under the Pension Code Regulations applicable to members of the Defence Service is fully exempt from tax.
2. Central / State Government Employees: Any death cum retirement gratuity is fully exempt from tax.
3. Non-government employees covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the following:
(i) Rs 10,00,000
(ii) Gratuity actually received
(iii) 15 days‘ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months
Note: Salary for this purpose means basic salary and dearness allowance. No. of days in a month for this purpose, shall be taken as 26.
4. Non-government employees not covered by the Payment of Gratuity Act, 1972 Any death cum retirement gratuity is exempt from tax to the extent of least of the following:
(i) Rs 10,00,000
(ii) Gratuity actually received
(iii) Half month‘s salary (based on last 10 months‘ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored)
Note: Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover. Students must also note the following points:
(1) Gratuity received during the period of service is fully taxable.
(2) Where gratuity is received from 2 or more employers in the same year then aggregate amount of gratuity exempt from tax cannot exceed Rs 10,00,000.
(3) Where gratuity is received in any earlier year from former employer and again received from another employer in a later year, the limit of ` 10,00,000 will be reduced by the amount of gratuity exempt earlier.
(4) The exemption in respect of gratuities would be available even if the gratuity is received by the widow, children or dependents of a deceased employee.
Illustration 6
Mr. Ravi retired on 15.6.2015 after completion of 26 years 8 months of service and received gratuity of Rs 6,00,000. At the time of retirement his salary was:
| Basic Salary | : Rs 5,000 p.m. |
| Dearness Allowance | : Rs 3,000 p.m. (60% of which is for retirement benefits) |
| Commission | : 1% of turnover (turnover in the last 12 months was Rs 12,00,000) |
| Bonus | : Rs 12,000 p.a. |
Compute his taxable gratuity assuming:
(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.
Solution
(a) He is covered by the Payment of Gratuity Act 1972.
| Gratuity received at the time of retirement | Rs 6,00,000 | |
| Less: Exemption under section 10(10) | ||
| Least of the following: | ||
| i. Gratuity received | Rs 6,00,000 | |
| ii. Statutory limit | Rs 10,00,000 | |
| iii. 15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months | ||
| 15/26 * last drawn salary * years of service | ||
| 15/26 * ( Rs 5,000+ Rs 3,000) * 27 = | Rs 1,24,615 | Rs 1,24,615 |
| Taxable Gratuity | Rs 4,75,385 |
(b) He is not covered by the Payment of Gratuity Act 1972.
| Gratuity received at the time of retirement | Rs 6,00,000 |
| Less: Exemption under section 10(10) (Note 1) | Rs 1,01,400 |
| Taxable Gratuity | Rs 4,98,600 |
Note 1: Exemption under section 10(10) is least of the following:
| i. Gratuity received | Rs 6,00,000 |
| ii. Statutory limit | Rs 10,00,000 |
iii. Half month‘s salary based on average salary of last 10 months
preceding the month of retirement for each completed year of service.
i.e. 1/2 * Average salary * years of service
= 1/2 * [ (5,000 * 10) + (3,000 * 60% * 10) + ( 1% *12,00,000 * 10/ 12 ) ] /10 * 26
= Rs 1,01,400
(c) He is a government employee
| Gratuity received at the time of retirement | Rs 6,00,000 |
| Less : Exemption under section 10(10) | Rs 6,00,000 |
| Taxable gratuity | Nil |