Tax treatment of past service gratuity

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Querist : Anonymous

Querist : Anonymous (Querist)

31 July 2013 Hi, there

My question is what would be the tax treatment and provision for yer's contribution as sixth year instalment of single premium towards past service gratuity liability.

As far as I know for income tax purpose initial contribution as past service gratuity can be made either in lumpsum or in five instalment not more than that.

Thanks.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)

31 August 2013 Gratuity is exempted as and when received as per the number of years service so wait till it is received on your retirement

Querist : Anonymous

Querist : Anonymous (Querist)

31 August 2013 thanks for reply, but my ques. is from employer point of view? not concern with employee.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

26 July 2025 Got it! Your question is about the **tax treatment from the employer’s perspective** regarding **contributions towards past service gratuity liability**, especially when paid in more than five installments (like a sixth-year installment). Here's a clear explanation:

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## Tax Treatment of Past Service Gratuity Contribution — Employer’s Point of View

### 1. **Background**

* When an employer has **past service gratuity liability** (e.g., for employees before a gratuity scheme was established), the employer may pay contributions as a **single premium** or in **instalments**, usually up to 5 years, to a gratuity fund/trust.

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### 2. **What about the 6th year installment?**

* **Income Tax Act allows spreading the past service gratuity contribution over a maximum of 5 years** (Section 36(1)(viii) read with Rule 6 of the Income Tax Rules).
* Contributions beyond 5 years (like a 6th installment) are **not eligible for deduction** in that year.
* In other words, the employer **cannot claim a deduction for past service gratuity contributions beyond 5 years**.
* Such excess payments are treated as **capital expenditure** or **business expenses**, but **not allowed as deduction** under the gratuity provisions.

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### 3. **Deduction for Employer**

* Deduction is allowed **only up to 5 years** for past service gratuity contributions.
* Employer must **plan payment schedule accordingly** to maximize tax benefit.
* If the contribution is made in lump sum or within 5 years, it is **allowed as business expense** under Section 36(1)(viii).

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### 4. **Summary Table**

| Particulars | Tax Treatment for Employer |
| --------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ |
| Past service gratuity contribution paid in lump sum or within 5 years | Deductible as business expense under Section 36(1)(viii) |
| Contribution paid beyond 5 years (e.g., 6th year installment) | **Not deductible** under gratuity provisions; treated as capital expenditure or non-deductible expense |

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### 5. **Practical Advice**

* Ensure all past service gratuity contributions are paid **within 5 years** for tax deductibility.
* Contributions beyond 5 years can only be deducted as **normal business expenses** if allowable under general provisions.

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