Income Tax on Gratuity
What is Gratuity in India?
Gratuity is a part of salary that is provided to an employee as a retirement benefit to show a sense of gratitude towards his services rendered to the organization. It is payable to an employee on his termination only after he has completed 5 years of continuous service. However, in case of death or disablement, the gratuity gets paid even before completion of 5 years.
Tax Treatment of Gratuity Received
The taxation of Gratuity primarily depends on the nature of employee who receives the Gratuity. The three categories according to which the taxability and tax exemption on gratuity is calculated are as under :
- Taxability of Gratuity received by Government employee.
- Taxability of Gratuity received by Non-Government employee who is covered under Payment of Gratuity Act 1972.
- Taxability of Gratuity in case of Non-government Employee who is not covered under Payment of Gratuity Act 1972.
Let’s discuss the above-mentioned categories in detail.
Taxation of Gratuity received by Government employee
In case of Government employees, the gratuity is not taxable at all. For example, Archana Bhatt is a central government employee. She retired from her service in December 2015 and received gratuity of Rs. 8,40,000. Now, as Archana is central government employee, her entire amount of gratuity will be exempt from tax.Taxation of gratuity in case of Non Government employee covered by the Payment of Gratuity Act 1972 (Section 10(10)(ii))
The Income Tax Department has given exemption from Income Tax if the gratuity is received by non-government employee covered under Payment of Gratuity Act 1972. As per section 10(10)(ii), the least of the following is exempt from Income Tax & the remaining gratuity is taxable.
- 15 days salary for each completed year of service or part in excess of 6 months
- Rs. 10,00,000
- Amount of gratuity actually received
In case of seasonal employment, the period of 15 days shall be substituted with 7 days. The formula for calculating 15 days salary is mentioned below.
15 days salary = Salary last drawn x 15/26
Here 26 is the number of working days in a month.
For example, after serving for the period of 25 years, Mr. Satish Bhatia retired from a private company on 15th Jan, 2016. His basic salary per month during 10 months preceding the month of retirement was Rs. 60,000. His other details are as below :
- Dearness allowance per month during 10 months preceding the month of retirement
- Forming part of salary for computing retirement benefits: Rs. 60,000
- Not forming part of salary for computing retirement benefits: Rs. 10,000
- At the time of retirement, he received gratuity of Rs. 25, 20,000
Now, we need to compute the amount of exemption in respect of gratuity under section 10(10)(ii)(iii) considering the Payment of Gratuity Act, 1972, covers Mr. Satish Bhatia.
As per section 10(10)(ii), tax exemption on gratuity received by non-government employee covered by the Payment of Gratuity Act, 1972 is least of the following :
|
|
| 15 days salary for each completed year of service or part of excess of 6 months |
Rs. 19,50,000 |
| Maximum amount specified by the central government |
Rs. 10,00,000 |
| Actual amount received |
Rs. 25,20,000 |
So, the amount of exemption under section 10(10)(ii) will be Rs. 10,00,000 as it is the least of above. Thus, the taxable amount of gratuity will be Rs. 15,20,000 (Rs. 25,20,000 - Rs. 10,00,000).
Taxation of gratuity in case of non-government employee not covered by the Payment of Gratuity Act 1972
If the non-government employee, not covered under payment of gratuity act, receives the gratuity then the amount received after taking the benefit of exemption shall be taxable. In calculating the exemption limit, least of the following is exempt from Income Tax as per section 10(10)(iii).
- Half month’s average salary for each completed year of service i.e. (average monthly salary x 1/2) x completed year of service
- Maximum amount specified by the Central Government i.e. Rs. 10,00,000
- Gratuity actually received
Following points need to be kept in mind.
- Average monthly salary is to be computed on the average of salary for 10 months immediately preceding the month (not the day) of retirement
- Salary for this purpose will include basic salary, dearness allowance, and commission based on fixed percentage of turnover achieved by the employee if such provision is available to him.
- While computing completed year of service, we need to ignore any fraction of year
For example, after working for a period of 25 years 9 months, Archana Bhatt retired from a private firm on 15th Feb, 2016. For the past 10 months preceding the month of retirement (i.e. monthly salary which she drew from 1-4-2015 to 31-01-2016) was Rs. 60,000. The dearness allowance which she had been receiving for past 10 months preceding the month of retirement was Rs. 60,000 (was part of salary for computing retirement benefits) and Rs. 10,000 (not part of salary for computing retirement benefits). She also received gratuity of Rs. 25,20,000 at the time of retirement.
As per section 10(10)(iii), tax exemption on gratuity received by non-government employee (not covered by the Payment of Gratuity Act, 1972) is least of the following.
|
|
| 1. Half month’s salary for each completed year of service |
Rs. 15,00,000 |
| 2. Maximum amount specified by the Central Government |
Rs. 10,00,000 |
| 3. Actual amount received |
Rs. 25,20,000 |
For Archana, the amount of exemption under section 10(10)(iii) will be Rs. 10,00,000 as it is the least of all mentioned above. Thus the taxable gratuity of Archana will be Rs. 15,20,000 (Rs. 25,20,000- Rs. 10,00,000).
Calculation of half month’s salary –
(Salary + Dearness Allowance)*1/2*completed year of service i.e. (60000+60000)*1/2*25 = 1500000
How to calculate Income Tax on Gratuity?
Since any gratuity received by government employee is exempt from Income Tax, the tax liability on such gratuity will be ‘Nil’. In the case of non-government employee the tax on gratuity will be calculated on the amount arrived after deducting exempt amount (as discussed above) from gratuity received. On this taxable amount, income tax on gratuity will be calculated as per Income Tax Slab Rates.
Calculate taxable and exempt gratuity with the Gratuity Calculator.
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