Employee benefits Tax Implications of Gratuity

Tax Implications of Gratuity

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Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. To have a brief knowledge about gratuity and applicable laws read our article on gratuity click here

Let’s have a brief discussion about the tax implications of Gratuity

Sec.10(10) deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

For the purpose of Income Tax, we have divided our discussion in a few scenarios.

Scenario 1.Gratuity received during the continuation of service

In this scenario gratuity received is fully taxable. There is no exemption benefit for anyone. Whether you are a government employee or a non-government employee your gratuity amount will be added as salary income u/s 17(1) and you have to pay tax on the whole amount of gratuity.

Scenario 2.Gratuity received after the death of the employee.

Gratuity received by a legal heir on the death of the employee is fully exempt from the tax that is the recipient will not be required to pay any tax on the gratuity employee. The same is applicable to the government or non-government employees.

Scenario 3.Gratuity received at the time of retirement / resignation.

Case 1. Government Employee: Gratuity received at the time of termination of service by Government employee (Central/State Government or local authority) is fully exempt from tax u/s 10(10) (i). 

Case 2. Non Government Employee: 

A. Employees covered under the Payment of Gratuity Act 1972.

In case of an employee covered under the payment of gratuity act minimum of the following amount is exempted for tax.

  1. Actual Gratuity received; 
  2. Rs. 20,00,000/-(Amended on 29th March 2018)
  3. 15 working days salary for every completed year of service

Note 1. If an employee working tenure consists of part of the year and that part is of more than 6 months then it should be considered as a complete year. For ex 6 years & 7 months should be counted as 7 years.

Note 2. Salary here means Basic + DA, last drawn

B.  Employees not covered under the Payment of Gratuity Act 1972.

In case of an employee not covered under the payment of gratuity act minimum of the following amount is exempted for tax.

  1. Actual Gratuity received;
  2. Rs 10,00,000/-(Not covered in Amendment)
  3. 1/2 * Completed year of service * Average Salary p.m

Note 1. If an employee working tenure consists such part should be ignored irrespective of the fact whether it is of more than 6 months or less than than 6 months. For ex 6 years & 7 months should be counted as 6 years

Note 2. Average Salary here means, Basic + DA + Commission (being a fixed percentage on turnover) being last 10 months average salary, immediately preceding the month of retirement.

We hope you must have all your doubts about the taxation of gratuity cleared after reading the above articles. If you have any query you can comment in the below section.

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Tax Implications of Gratuity

Sec.10(10) deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

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