Is Gratuity Taxable?
Updated on : 2020-Dec-11 17:03:01 | Author :
Taxation Process of Gratuity
The process of taxation of gratuity is depends on the receiver of the gratuity amount.
When a government employee receives the gratuity amount: If the employee works under the state or central government or local authority and receives gratuity, then his gratuity amount is fully exempt from income tax.
When a salaried employee receives the gratuity amount from an employer covered by the act: If the employee’s employer is covered under the Gratuity Act, then the amount that is exempt from tax is: fifteen days salary as per the employee’s last drawn salary.
When a salaried employee receives the gratuity amount from an employer not covered by the act: Then, the least of the following amounts is exempt from tax: INR 10,00,000 or gratuity taken by the worker or half a month’s salary for every year of service which the employee has completed with his employer.
Important rules
Forfeiture: The employer will forfeit the payment of gratuity, as per the Payment of Gratuity Act of 1972. This may be partial or whole even if the worker completes five or additional years of service within the company. This may happen if the worker must be terminated owing to his disturbance of the peace once he physically harms individuals throughout his service.
Payment timeline: The 3 main steps of payment are as follows
Initiation: The employee must send the application to the employer w.r.t. his / her gratuity owed by a company.
Acknowledgement and calculation: Once the application is received, the company that owes the gratuity calculates the amount and then provides a notice to the employee and controlling authority with the specified amount.
Disbursal: The employer has a timeframe of 30 days for paying the gratuity amount, after sending the acknowledgement.
Tax exemptions: Some policy changes made in the 2016 budget have caused the gratuity laws to change a little. Here are the key highlights:
As per Article 10(10) i of the Income Tax Act, gratuity that is received by government employees, besides statutory corporations, is fully exempt from tax.
As per Article 10(10)ii of the Income Tax Act, retirement and death gratuity receivable by the employee under the act is the least amount of the below options, which is exempt from tax:
(15/26) x Last drawn salary x Completed year of service or part in excess of 6 months (7 days if the employee belongs to a seasonal establishment)
INR 10 lakhs
Actual gratuity amount received
NB: Last drawn salary = Total salary that an employee receives including DA (Dearness Allowance). This excludes benefits like HRA, bonus, commission etc.
As per Article 10(10)iii of the Income Tax Act, the exemption of the gratuity amount that is received by employees not covered under the act is as follows:
Half month’s average salary X Completed years of service
INR 10 lakhs
Actual gratuity received
NB: Average salary = Average salary of the last ten months that immediately precede the retirement month.
Salary = Basic pay + DA + turnover based commission
Another point to note is that if the employee dies, his nominee or heir will get the gratuity amount. The receiver’s taxation is calculated under the head –income from other sources.
Key highlights about Gratuity :
While receiving gratuity from an employer, if the amount exceeds INR 10,00,000, then the tax exemption in this case is to be calculated based on the points highlighted under the taxation section above.
An employer can reject the gratuity payment of an employee if they have been told to leave the organization owing to their misconduct.
If the employee dies, the gratuity amount is paid to his/her heir or nominee. However, tax has to be calculated for this too, under the top income from different Sources.
Additional Resources:
