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Gratuity

Rafeeq Jassil (Accounts Manager) (53 Points)

03 September 2013

Friends,

Can you please provide the details of gratuity..?? Like, Gratuity applicability, workings, payments etc.

Regards,

Rafeeq

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3 Replies

CA Pallav Singhania (IT System Auditor) (33262 Points)
Replied 03 September 2013

The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail.

For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories –

Government employees and
Non-government employees covered under the Payment of Gratuity Act, 1972
Non-government employees not covered under the Payment of Gratuity Act, 1972

In case of government employees – they are fully exempt from receipt of gratuity.
In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

Actual gratuity received;
Rs 10,00,000;
15 days’ salary for each completed year of service or part thereof

Note:

Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored.
Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

Actual gratuity received;
Rs 10,00,000;
Half-month’s average salary for each completed year of service (no part thereof)

Note:

Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored.
Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10

Courtesy : Business Stnd.

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CA Pallav Singhania (IT System Auditor) (33262 Points)
Replied 03 September 2013

Illustration
Let’s understand the above math clearly with an example:
Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.

Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972.

•   Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm
•   Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2

Important points to remember
•   Generally, only government employers give DA to their employees. Above example is only for illustrative purpose.
•   The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors.
•   In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000.
•   Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years.
•   In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.

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jakson (Accountant) (41 Points)
Replied 23 January 2014

I am totally agree with aryan. Generally a Gratuity’ is a retrial benefit. This act envisages in providing a retirement benefit to the workman who have rendered long and unblemished service to the employer. Gratuity is a reward for long and meritorious service. Every factory , mine, oilfield, plantation, port, railways, company, shop, establishment or educational institutions employing ten or more employees.

Thank you..