Tax treatment of past service gratuity
This query is : Resolved
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.
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.
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.
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:
---
## 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.
---
### 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.
---
### 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).
---
### 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 |
---
### 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.
---
---
## 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.
---
### 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.
---
### 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).
---
### 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 |
---
### 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.
---
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Refund Annexure-B
- Liable to deduct tds and 44ADA
- Sale of Equity shares for Purchase of Residential Property
- Nomination of Bank for refund in itr 2
- Section 56(2) of the Income tax Act 1961 , Gift to relative .
- ECO SUPPLY REPORTIONG IN GSTR-1
- Is Interest applicable for payment made through credit ledger vide DRC03 for FY 2020-21 & 2021-22
- CCFS 2026 Schemed
- Subscription paid to foreign customer
- Two seprate Invoice needed
- E Commerce GSTR1 & 3B how to file
- GST Cancellation without jurisdiction
- Legal Opinion on Registrar's Refusal to Investigate a Society for Non-Renewal and Non-Compliance
- GST Refund_RFD-01
- Form10BD was uploaded successfully without any Error but after 24 hours, Form10BE are not available
- Annexure B utility for GST Refund
- Tax amount diff in Gstr1 and 3B in tax compare reports
- Tds on GST in connection with sale to public company
- Restoration of certificate of practice
- Regarding change in correspondence address in SSP portal
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
