Section 10(10) of the Income Tax Act, 1961 provides for exemption from tax on gratuity received by an employee. The exemption is available to all employees, irrespective of their employer, subject to certain conditions.

The exemption is available up to a maximum amount of Rs.20 lakhs. The amount of gratuity under income tax that is exempt will be 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 period of service for calculating the gratuity exemption is the period of continuous service with the employer. However, if the employee has also rendered service to any other employer, then that period of service is also included, subject to the condition that no gratuity has been received from that employer.

The exemption under income tax is also available to the legal heirs of a deceased employee, subject to the same conditions.

Here are some of the conditions that need to be satisfied in order to claim the exemption under income tax Section 10(10):

• The employee must have completed at least five years of continuous service with the employer.
• The gratuity must be paid in accordance with the Payment of Gratuity Act, 1972 under income tax.
• The gratuity must be paid on the employee’s retirement, death, resignation, or disablement.
• EXAMPLES

• What is Section 10(10) of the Income Tax Act?

Section 10(10) of the Income Tax Act provides for the exemption of gratuity received by an employee from income tax. The gratuity must be received on the termination of the employee’s service, on his/her death, or on his/her disablement due to an accident or disease.

• Who is eligible for the exemption under Section 10(10)income tax?

The exemption under Section 10(10)income tax is available to any employee, regardless of his/her salary or designation. However, the employee must have completed at least five years of continuous service in the organization to be eligible for the exemption.

• What is the maximum amount of gratuity that is exempt from tax under Section income tax of10(10)?

The maximum amount of gratuity that is exempt from tax under Section 10(10)income tax is Rs.20 lakhs. This limit is applicable to gratuity received on or after 29 March 2018.

• What are the documents required to claim the exemption under Section 10(10income tax)?

The following documents are required to claim the exemption under Section 10(10)income tax:

 Proof of service, such as the employee’s appointment letter, service record, FA and relieving letter.

 Proof of gratuity, such as the gratuity certificate issued by the employer.

 PAN card of the employee.

• How is the exemption under Section 10(10) under income tax claimed?

The exemption under Section 10(10)income tax is claimed in the employee’s income tax return. The employee must provide the necessary documents to support the claim.

Here are some additional things to keep in mind about Section 10(10)income tax:

• The exemption is only available for gratuity that is paid by the employer. If the gratuity is paid by a third party, such as a life insurance company, it is not exempt income tax from tax.
• The exemption is not available under income tax for gratuity that is paid in lump sum. If the gratuity is paid in instalments, the exemption will only apply to the instalments that are paid in the first year.
• The exemption is not available income tax for gratuity that is paid in lieu of notice pay.

FAQ QUESTIONS

• ITO vs. Bharat Bhushan (1996) 222 ITR 357 (SC): This case of income tax held that the exemption under Section 10(10) is available to all employees, including those who are not covered by the Payment of Gratuity Act, 1972. However, the amount of exemption is limited to the least of the following:
  • 15/26 of the last drawn salary multiplied by the number of completed years of service.
  • 20 lakhs.
• ITO vs. A.P.S.R. Employees’ Union (2005) 278 ITR 395 (SC): This case held that the exemption under Section 10(10) is not available to gratuity received by an employee in lieu of notice pay.
• ITO vs. M.V.S.L. Employees’ Union (2007) 293 ITR 126 (SC): This case held that the exemption under Section 10(10) is available to gratuity received by an employee who is retrenched.

In addition to these case laws, there are a number of other court decisions that have interpreted the provisions of Section 10(10)income tax. These decisions can be helpful in understanding the scope of the exemption and the factors that are considered in determining whether an employee is entitled to the exemption.

Here are some other case laws on Section 10(10):

• ITO vs. B.K. Modi (2001) 250 ITR 189 (SC): This case of income tax held that the exemption under Section 10(10) is available to gratuity received by an employee who is dismissed from service.
• ITO vs. Indian Airlines Employees’ Union (2004) 271 ITR 117 (SC): This case income tax held that the exemption under Section 10(10) is available to gratuity received by an employee who is retired on medical grounds.
• ITO vs. M.S. Ramaiah (2006) 286 ITR 151 (SC): This case income tax held that the exemption under Section 10(10) is available to gratuity received by an employee who is transferred to a subsidiary company.