Income tax on gratuity
This query is : Resolved
30 May 2014
Please let me know what is the income tax percentage rate for gratuity payment received during 2014-15 if gratuity is paid at one month's basic pay in case of resignation of an employee. What would be the TDS percentage deductible in the gratuity payment.
30 May 2014
it is part of salary so the tds is applicable accordingly.
30 May 2014
on resignation it is taxable under the salary head but if you recd. on retirement then you can get deduction u/s 10
30 May 2014
sec 10 is always applicable.....
30 May 2014
Thanks for the reply. Is the TDS applicable on the whole amount of gratuity or 15 days basic salary since the management is giving one month as gratuity.
30 May 2014
Thanks for the reply. As the management is giving one month basic pay as gratuity instead of 15 days as per rules, Please let me know whether TDS is applicable on 1 month amount or 15 days amount.
31 July 2024
**Income Tax and TDS on Gratuity Payment**
### 1. **Income Tax on Gratuity**
**For the Financial Year 2014-15:**
- **Tax Exemption Limits:** Gratuity received by an employee is generally exempt from tax up to certain limits as specified under the Income Tax Act, 1961. The exemption depends on the type of employer and the employee's length of service.
**Gratuity Calculation:**
- **Government Employees:** Gratuity is fully exempt from tax.
- **Non-Government Employees:** The tax exemption is calculated based on the following:
- **For Private Sector Employees:**
- **Maximum Exempt Amount:**
- ₹10 lakhs for gratuity received by employees of a private organization (as per amendments in the Finance Act).
- **Exempt Amount Calculation:**
- Gratuity received = Minimum of (1) 15 days' salary for each completed year of service, (2) ₹10 lakhs, or (3) Actual gratuity received.
**Specific to Your Query:**
- If an employee resigns and receives one month’s basic pay as gratuity instead of 15 days, the excess amount will be taxable.
**Example Calculation:**
- **Gratuity Calculation:** If the basic pay is ₹50,000 per month and the employee has served for 10 years, the statutory gratuity calculation would be:
- **15 Days' Salary for Each Year:**
\[
\text{Gratuity} = \text{Basic Pay} \times \frac{15}{30} \times \text{Number of Years} = ₹50,000 \times \frac{15}{30} \times 10 = ₹2,50,000
\]
- **Taxable Amount:** If the company gives ₹50,000 (one month’s basic pay) and the statutory amount is ₹2,50,000, the excess amount over the statutory amount is taxable.
### 2. **TDS on Gratuity**
**TDS Applicability:**
- TDS on gratuity is applicable if the amount received exceeds the exempt limit (₹10 lakhs) or is taxable based on the computation as described above.
- **TDS Rate:** The TDS rate on gratuity is generally at the applicable income tax slab rate of the employee. The employer should deduct TDS based on the employee's total income including gratuity.
**Specifics:**
- **One Month’s Basic Pay:** If the management provides one month’s basic pay as gratuity (₹50,000), the TDS should be computed based on the taxable portion of the gratuity if it exceeds the exempt limit or is in addition to other taxable income.
- **TDS on 15 Days Amount:** TDS is applicable on the entire amount of gratuity paid, provided the amount is taxable.
**Calculation of TDS:**
- **If Exempt Limit is Exceeded:**
- Compute TDS based on the applicable slab rates after deducting any exempt amount.
- **If Not Exempt:**
- Calculate TDS as per the employee’s income tax slab.
**Summary:**
- **Gratuity Taxability:** Amount exceeding the statutory limit (15 days per year) or ₹10 lakhs is taxable.
- **TDS Deduction:** TDS should be deducted based on the taxable amount of gratuity at the applicable income tax slab rate.
### Recommendations:
1. **Confirm with Employer:** Ensure that the employer correctly computes the statutory gratuity and any excess amount is properly assessed for tax.
2. **Consult a Tax Professional:** For accurate calculation and compliance with tax laws, especially with regard to exemption limits and TDS rates, consult with a tax advisor.
### 1. **Income Tax on Gratuity**
**For the Financial Year 2014-15:**
- **Tax Exemption Limits:** Gratuity received by an employee is generally exempt from tax up to certain limits as specified under the Income Tax Act, 1961. The exemption depends on the type of employer and the employee's length of service.
**Gratuity Calculation:**
- **Government Employees:** Gratuity is fully exempt from tax.
- **Non-Government Employees:** The tax exemption is calculated based on the following:
- **For Private Sector Employees:**
- **Maximum Exempt Amount:**
- ₹10 lakhs for gratuity received by employees of a private organization (as per amendments in the Finance Act).
- **Exempt Amount Calculation:**
- Gratuity received = Minimum of (1) 15 days' salary for each completed year of service, (2) ₹10 lakhs, or (3) Actual gratuity received.
**Specific to Your Query:**
- If an employee resigns and receives one month’s basic pay as gratuity instead of 15 days, the excess amount will be taxable.
**Example Calculation:**
- **Gratuity Calculation:** If the basic pay is ₹50,000 per month and the employee has served for 10 years, the statutory gratuity calculation would be:
- **15 Days' Salary for Each Year:**
\[
\text{Gratuity} = \text{Basic Pay} \times \frac{15}{30} \times \text{Number of Years} = ₹50,000 \times \frac{15}{30} \times 10 = ₹2,50,000
\]
- **Taxable Amount:** If the company gives ₹50,000 (one month’s basic pay) and the statutory amount is ₹2,50,000, the excess amount over the statutory amount is taxable.
### 2. **TDS on Gratuity**
**TDS Applicability:**
- TDS on gratuity is applicable if the amount received exceeds the exempt limit (₹10 lakhs) or is taxable based on the computation as described above.
- **TDS Rate:** The TDS rate on gratuity is generally at the applicable income tax slab rate of the employee. The employer should deduct TDS based on the employee's total income including gratuity.
**Specifics:**
- **One Month’s Basic Pay:** If the management provides one month’s basic pay as gratuity (₹50,000), the TDS should be computed based on the taxable portion of the gratuity if it exceeds the exempt limit or is in addition to other taxable income.
- **TDS on 15 Days Amount:** TDS is applicable on the entire amount of gratuity paid, provided the amount is taxable.
**Calculation of TDS:**
- **If Exempt Limit is Exceeded:**
- Compute TDS based on the applicable slab rates after deducting any exempt amount.
- **If Not Exempt:**
- Calculate TDS as per the employee’s income tax slab.
**Summary:**
- **Gratuity Taxability:** Amount exceeding the statutory limit (15 days per year) or ₹10 lakhs is taxable.
- **TDS Deduction:** TDS should be deducted based on the taxable amount of gratuity at the applicable income tax slab rate.
### Recommendations:
1. **Confirm with Employer:** Ensure that the employer correctly computes the statutory gratuity and any excess amount is properly assessed for tax.
2. **Consult a Tax Professional:** For accurate calculation and compliance with tax laws, especially with regard to exemption limits and TDS rates, consult with a tax advisor.
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