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Gratuity Exemption – Sec 10(10)

U.C Date : 25 Feb 2015

If Gratuity is received by any employee while in employment then it is fully taxable in the hands of employee. While if gratuity is received in case of death or retirement or resignation, then exemption is available up to the following limits.

In case of Government employee – Any gratuity received by an employee of Central Government, State Government or local authority is wholly exempt from tax. This exemption is not available to employees of Statutory Corporation.

In case of employees covered by Payment of Gratuity Act –

An amount equal to the least of the following will be exempt from tax

  • 15/26 x Salary last drawn x No. Of completed years of service or part thereof in excess of 6 months.
  • 10,00,000
  • Gratuity actually received

Notes:

In case of seasonal establishments, 15 days is substituted by 7 days.

Salary includes basic salary and dearness allowance but does not include bonus, commission, overtime wages or any other allowance.

Part of a year exceeding six months is taken as a complete year.

In case of any other employee –

An amount equal to the least of the following will be exempt from tax

  • ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
  • 10,00,000
  • Gratuity actually received

Notes:

Salary includes basic pay, dearness allowance to the extent it forms part of retirement benefits and percentage wise fixed commission on turnover.

If gratuity is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of gratuity cannot exceed Rs. 10,00,000.

If an employee had also  rendered service to any other employer, then period of service to such former employer is also included while calculating “completed year of service” subject to condition that any gratuity is not received from such former employer.

Bare Act for Sec 10(10)

Bare Act for Sec 10(10)

(i) any death cum retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence services ;

(ii)  any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act ;

(iii)  any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month’s salary for each year of completed service, [calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government] :

Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this clause [shall not exceed the limit so specified] :

Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this clause [shall not exceed the limit so specified] as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

Explanation.—[In this clause, and in clause (10AA)], “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule ;]

9 comments

  1. Recd Rs 16.33 Lacs as Gratuity on Retirement in Fin year 2015-16 as a PSU officer. Rs 10 Lacs exempt. Balance 6.33 Lac would be taxed @ 30.9% or average of tax rate actually paid in previous 3 years ( 19.12%)?

    Also recd 8.62 Lacs leave encashment on Retirement. Rs 3 Lac exempt. Pl tell treatment of balance 5.62 Lacs

    • Prateek Agarwal

      These amount is not taxed at any specific rate but they are added to your total income. And then taxable as per income tax slab.

    • To my (CA student) knowledge the balance beyond 300000 shall be considered as income chargeable to tax under the head salary
      For further reference w.r.t Tax treatnent of leave salary go to section 10(10aa) of income tax act.

  2. I was retired from National insurance co. (PSU) & got gratuity of Rs. 1000000 in2013-14. Due to wage revision I got Rs. 340000 more being gratuity in 2015-16 so please be informed whether this amount is exempt or taxable

    • Prateek Agarwal

      The amount of gratuity is taxable but exemption is available under this section. If amount of exemption claimed earlier is now deducted from rs. 10 lakh to calculate the maximum limit of deduction.

  3. sir in case of employee covered under gratuity act if the completed service is 10years and 6months then what no of years should be taken..?

    • Prateek Agarwal

      If the period is 10 years and 6 months then 10 years should be taken in calculation. If the period is more than 6 months than it will be rounded off to the higher multiple.

  4. I have joined the company on 14-march-2011 & resigned on 30-Nov-2015. I am about to complete 4 years & 9 months service. I would like to request your kindself to please let me know that am I eligible for Gratuity & also suggest me any judiciary cases of such kind are being done recently.

    • Rohit Agarwal

      Ramesh, I have attached a case law,Mettur Beardsell Ltd, Madras v/s Regional Labour Commissioner 1998, which is very similar with yours. As per the case law, you are eligible for Gratuity.

      PDF of Case Law

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