Gratuity Exemption – Section 10(10)

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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

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

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

Also Read: Section 43B – Gratuity is allowed as expense to employer when paid before due date.

Other Points Related to Taxation

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.

In case of death of the employee, it has to be paid to the nominee or the legal heir of the employee. In this case, the exemption is calculated in the same manner as above and is taxed for the receiver under the head “Income from Other Sources”.

When is Gratuity Payable as per Payment of Gratuity Act 1972

Gratuity is payable to an employee when an employee leaves employment after completing at least five years in service with an employer – so this is payable –

  • On superannuation (means an employee who attains the age of retirement is said to be in superannuation)
  • On retirement or resignation
  • On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

Gratuity is not paid as part of your regular monthly salary; it is only payable on the occurrence of any of the above events.

If the employee’s services have been terminated due to any misconduct, the employer has the right to reject payment of Gratuity to the employee.

Gratuity Applicability as per Payment of Gratuity Act 1972

Every person working in a factory, mine, oil field, port, railways, plantation, Shops & Establishments, or educational institution having 10 or more employees on any day in the preceding 12 months is entitled to Gratuity. It is applicable for only permanent employees and not for trainees/interns.

Once the Act becomes applicable to an employer – even if the number of employees goes below 10, gratuity is still applicable.

To whom Gratuity is Payable?

Gratuity is normally payable to the employee himself, however in the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs. Incase the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Maximum amount payable under the Gratuity Act

Maximum gratuity payable is Rs 10 lakhs  for Government & Non Government  employees. [Section 4(3)] [Of course, employer can pay more. Employee has also right to get more if obtainable under an award or contract with employer, as made clear in section 4(5)].

Nomination facility

Each employee is required to nominate one or more member of his family, as defined in the Act, who will receive the gratuity in the event of the death of the employee by filing Form “F”.

Source: Payment of Gratuity Act 1972

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