Gratuity is a payment made by an employer to an employee on the termination of employment, death, or disablement. It is a form of deferred compensation.

Section 10(10) of the Income Tax Act, 1961 provides for exemption of gratuity from income tax. The exemption is available to employees who are covered by the Payment of Gratuity Act ,income tax 1972.

The amount of gratuity that is exempt from tax is the least of the following:

• 15/26 of the employee’s salary last drawn multiplied by the number of completed years of service.
• 20 lakhs.
• The actual amount of gratuity received.

For example, if an employee retires after 20 years of service and receives a gratuity of Rs.30 lakhs, the tax-exempt amount will be Rs.20 lakhs. The balance of Rs.10 lakhs will be taxable.

The exemption under section 10(10)income tax is also available to employees of the Central Government, State Governments, and local authorities, even if they are not covered by the Payment of Gratuity Act. However, the exemption is not available to employees of statutory corporations.

Here are some important points to keep in mind about the tax exemption on gratuity under section 10(10)income tax:

• The exemption of income tax is available only to gratuity that is paid under a legal obligation. Gratuity that is paid voluntarily by the employer is not exempt from tax.
• The exemption of income tax is available only to employees who have rendered at least five years of service.
• The exemption of income tax is available only for gratuity that is paid on retirement, death, or disablement.
• The exemption of income tax is available only for the first Rs.20 lakhs of gratuity. Any amount that exceeds Rs.20 lakhs are taxable.

EXAMPLE

• Gratuity in Maharashtra

The Payment of Gratuity Act, 1972 income taxis applicable in Maharashtra. Under income tax this Act, an employee is entitled to gratuity if he/she has rendered continuous service for at least five years. The amount of gratuity is calculated as follows:

15 days’ salary for every completed year of service

The salary for calculating gratuity is the last drawn salary, including dearness allowance. The maximum amount of gratuity that an employee can receive is Rs.20 lakhs.

In Maharashtra, gratuity is not taxable if the amount is less than Rs.2 lakhs. .However, if the amount is more than Rs.2 lakhs, the excess amount will be taxable.

Here is an example of how gratuity is calculated in Maharashtra:

• Let’s say an employee has worked for 10 years in a company and his last drawn salary was Rs.10,000 per month.
• The amount of gratuity that he will be entitled to is 15 days’ salary for every completed year of service, which is 15 * 10,000 = Rs.1,50,000.
• Since the amount is less than Rs.2 lakhs, it is not taxable.

FAQ QUESTIONS

• Who is eligible for gratuity in India?

Any employee who has completed at least five years of continuous service in an organization under income tax is eligible for gratuity. However, there are some exceptions to this rule, such as employees who are terminated for misconduct or those who resign without notice.

• How is gratuity calculated in India?

The gratuity amount is calculated as 15 days of the employee’s last drawn salary for every completed year of income tax service. The salary for calculating gratuity includes basic pay, dearness allowance, and any other allowances that are paid regularly.

• What is the maximum amount of gratuity that can be paid in India?

The maximum amount of income tax gratuity that can be paid in India is Rs.20 lakhs. This limit was increased from Rs.10 lakhs in 2021.

• Is gratuity taxable in India?

Gratuity is not taxable in India, if the following conditions are met:

* The gratuity is paid to an employee who has completed at least five years of service.

* The gratuity amount does not exceed Rs.20 lakhs.

* The gratuity is paid in lump sum.

• What are the different types of gratuity in India?

There are two types of gratuity in India: retirement gratuity and death gratuity.

* Retirement gratuity is paid to an employee on his/her retirement.

* Death gratuity is paid to the nominee of an employee who dies while in service.

• What are the documents required to claim gratuity in India?

The following documents are required to claim gratuity in India:

* Letter of appointment

* Salary slips for the last five years

* Retirement/death certificate

* Nominee’s proof of identity and address

• Where can I claim gratuity in India?

Gratuity can be claimed from the employer. The employer is required to pay the gratuity within 30 days of the employee’s retirement or death.

CASE LAWS

• CIT vs. Coal India Limited (2011): This case of income tax was about the taxability of gratuity paid to employees of Coal India Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it exceeded the statutory limit under the Payment of Gratuity Act, 1972. The Court reasoned that the Income Tax Act, 1961, gives overriding effect to the provisions of the Payment of Gratuity Act, 1972.
• CIT vs. Indian Airlines Corporation (2004): This case of income tax was about the taxability of gratuity paid to employees of Indian Airlines Corporation. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid in lump sum. The Court reasoned that the gratuity was paid in lieu of the pension that the employees would have received on retirement.
• CIT vs. National Fertilizers Limited (2001): This case of income tax was about the taxability of gratuity paid to employees of National Fertilizers Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had died before retirement. The Court reasoned that the gratuity was paid to the employee’s nominee, and it was not taxable in the hands of the nominee.
• CIT vs. Bharat Heavy Electricals Limited (1999): This case of income tax was about the taxability of gratuity paid to employees of Bharat Heavy Electricals Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had resigned from service. The Court reasoned that the gratuity was paid to the employee in recognition of his long and meritorious service.

CIT vs. Indian Oil Corporation (1998): This case of income tax was about the taxability of gratuity paid to employees of Indian Oil Corporation. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had been terminated from service. The Court reasoned that the gratuity was paid to the employee as compensation for the loss of his job.