Payment of gratuity to employee
This query is : Resolved
29 November 2013
Organisation is paying gratuity to employees. Employees in the organisation are more than 700.It is paying as per its own rules which is over and above as required by the payment of gratuity act 1972.How to calculate exempted portion as per the Income tax act i.e 15/26*last drawn salary*completed years of service or half months salary*completed years of service.(It is not government organisation)
29 November 2013
Since the employees are not covered under the PGA,1972, Half Month's Avg Salary * Completed Year in Service will be the one of the 3 criteria prescribed.
.
In such a case fraction of a year will be ignored.
.
Average Salary has to be computed on the basis of completed 10 months salary immediately before the retirement.
.
In such a case fraction of a year will be ignored.
.
Average Salary has to be computed on the basis of completed 10 months salary immediately before the retirement.
29 November 2013
thank you sir
but as per the gratuity act.. any organisation having employees more than 10 are covered under gratuity act.. thus even this organisation is to be considered under gratuity act and taxability need be as per 15/26 * last drawn salary*no.of completed years of service
but as per the gratuity act.. any organisation having employees more than 10 are covered under gratuity act.. thus even this organisation is to be considered under gratuity act and taxability need be as per 15/26 * last drawn salary*no.of completed years of service
29 November 2013
and sir how to know whether a organisation is covered under gratuity act.. is it only through the no of employees below 10.. or is there any other things to be considered....????
29 November 2013
does mere payment of gratuity which is more than the amount specified under the gratuity act implies that gratuity act is not applicable to such organisation...????
29 November 2013
In spite of making a guess work , it is better to inquire the organisation itself.
The fact is just one step away.
.
The fact is just one step away.
.
03 December 2013
It is a hypothetical situation sir, there is no such organisation in existence
09 August 2024
### **Applicability of the Payment of Gratuity Act and Calculation of Exempted Portion**
**1. Applicability of the Payment of Gratuity Act, 1972:**
- **Coverage**: The Payment of Gratuity Act, 1972 applies to every establishment that employs **10 or more employees**. This includes all types of organizations, whether private or public, and irrespective of their nature of business.
- **Criteria**: The Act applies to establishments with 10 or more employees on any day during the financial year. If an organization consistently has fewer than 10 employees, the Act may not apply.
- **Exemptions**: The applicability of the Act is not affected by the amount of gratuity paid beyond the statutory requirement. An organization paying more than the statutory minimum does not imply that the Act is not applicable. The Act's applicability is based on the number of employees, not the amount of gratuity paid.
**2. Calculation of Exempted Portion under Income Tax Act:**
- **Gratuity Calculation Under Payment of Gratuity Act**: The gratuity payable under the Act is calculated as:
\[
\text{Gratuity} = \frac{15 \text{ days' wages}}{26} \times \text{Last Drawn Salary} \times \text{Completed Years of Service}
\]
- Where `15 days' wages` is based on the employee’s last drawn salary, and `26` represents the number of working days in a month for this calculation.
- **Exempt Portion Under Income Tax Act**: For tax purposes, the exempt portion of gratuity under the Income Tax Act is computed based on the provisions of Section 10(10) of the Act:
\[
\text{Exempted Gratuity} = \frac{15 \text{ days' wages}}{26} \times \text{Last Drawn Salary} \times \text{Completed Years of Service}
\]
- If the employee is covered under the Payment of Gratuity Act, this formula applies.
- If the organization is not covered under the Act, the exemption will be based on the actual gratuity paid, subject to the Income Tax rules and limits.
**3. Verification of Applicability of the Gratuity Act:**
- **Employee Count**: The primary criterion for the applicability of the Gratuity Act is the number of employees. If the organization consistently employs 10 or more employees, the Act applies.
- **Organization Type**: There is no specific exemption based on the type of organization (private, public, or government) in relation to the applicability of the Gratuity Act.
- **Payment of Gratuity**: Paying more than the statutory amount does not affect the applicability of the Act. The Act's applicability is determined by the number of employees, not the amount of gratuity.
**4. Steps to Confirm Applicability:**
- **Review Employee Count**: Check if the organization consistently employs 10 or more employees.
- **Consult Legal or HR Experts**: For detailed compliance checks and guidance, consult with a legal or HR expert knowledgeable about employment laws and the Payment of Gratuity Act.
- **Check for Notifications**: Look for any notifications or amendments from relevant labor departments or authorities that may affect the applicability of the Act.
**5. Practical Guidance:**
- If your organization has more than 10 employees, the Payment of Gratuity Act applies, and the gratuity calculation for tax exemption purposes should follow the formula specified under the Act.
- Ensure that the calculation of the exempt portion of gratuity for tax purposes adheres to the Income Tax Act provisions.
By adhering to these guidelines and consulting with relevant experts, you can ensure compliance with both the Payment of Gratuity Act and Income Tax Act.
**1. Applicability of the Payment of Gratuity Act, 1972:**
- **Coverage**: The Payment of Gratuity Act, 1972 applies to every establishment that employs **10 or more employees**. This includes all types of organizations, whether private or public, and irrespective of their nature of business.
- **Criteria**: The Act applies to establishments with 10 or more employees on any day during the financial year. If an organization consistently has fewer than 10 employees, the Act may not apply.
- **Exemptions**: The applicability of the Act is not affected by the amount of gratuity paid beyond the statutory requirement. An organization paying more than the statutory minimum does not imply that the Act is not applicable. The Act's applicability is based on the number of employees, not the amount of gratuity paid.
**2. Calculation of Exempted Portion under Income Tax Act:**
- **Gratuity Calculation Under Payment of Gratuity Act**: The gratuity payable under the Act is calculated as:
\[
\text{Gratuity} = \frac{15 \text{ days' wages}}{26} \times \text{Last Drawn Salary} \times \text{Completed Years of Service}
\]
- Where `15 days' wages` is based on the employee’s last drawn salary, and `26` represents the number of working days in a month for this calculation.
- **Exempt Portion Under Income Tax Act**: For tax purposes, the exempt portion of gratuity under the Income Tax Act is computed based on the provisions of Section 10(10) of the Act:
\[
\text{Exempted Gratuity} = \frac{15 \text{ days' wages}}{26} \times \text{Last Drawn Salary} \times \text{Completed Years of Service}
\]
- If the employee is covered under the Payment of Gratuity Act, this formula applies.
- If the organization is not covered under the Act, the exemption will be based on the actual gratuity paid, subject to the Income Tax rules and limits.
**3. Verification of Applicability of the Gratuity Act:**
- **Employee Count**: The primary criterion for the applicability of the Gratuity Act is the number of employees. If the organization consistently employs 10 or more employees, the Act applies.
- **Organization Type**: There is no specific exemption based on the type of organization (private, public, or government) in relation to the applicability of the Gratuity Act.
- **Payment of Gratuity**: Paying more than the statutory amount does not affect the applicability of the Act. The Act's applicability is determined by the number of employees, not the amount of gratuity.
**4. Steps to Confirm Applicability:**
- **Review Employee Count**: Check if the organization consistently employs 10 or more employees.
- **Consult Legal or HR Experts**: For detailed compliance checks and guidance, consult with a legal or HR expert knowledgeable about employment laws and the Payment of Gratuity Act.
- **Check for Notifications**: Look for any notifications or amendments from relevant labor departments or authorities that may affect the applicability of the Act.
**5. Practical Guidance:**
- If your organization has more than 10 employees, the Payment of Gratuity Act applies, and the gratuity calculation for tax exemption purposes should follow the formula specified under the Act.
- Ensure that the calculation of the exempt portion of gratuity for tax purposes adheres to the Income Tax Act provisions.
By adhering to these guidelines and consulting with relevant experts, you can ensure compliance with both the Payment of Gratuity Act and Income Tax Act.
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