Section 10(10) of the Income Tax Act, 1961 provides for exemption from income tax on gratuity received by an employee who is covered by the Payment of Gratuity Act, under income tax1972. The exemption is available for the least of the following amounts:

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

For example, if an employee’s last drawn salary is Rs.100,000 and he has completed 10 years of service, the maximum amount of gratuity that will be exempt from tax is Rs.150,000 (15/26 * 100,000 * 10).

The exemption is available even if the gratuity is paid in instalments. However, the exemption is not available if the gratuity is paid in lieu of notice pay or salary in lieu of leave.

The exemption is also not available under income tax if the gratuity is received by an employee who is not a citizen of India.

Here are some additional points to note about the income tax exemption on gratuity under Section 10(10):

• The exemption is available to all employees who are covered by the Payment of Gratuity Act, under income tax 1972, regardless of their salary or the number of years of service.
• The exemption is available even if the gratuity is paid by an employer who is not covered by the Payment of Gratuity Act, under income tax 1972, as long as the employee is covered by the Act.
• The exemption is available for gratuity received on retirement, death, disablement, or resignation.
• The exemption is not available for gratuity received in lieu of notice pay or salary in lieu of leave.

EXAMPLES

• An employee of a income tax company in West Bengal retires after 20 years of service. His last drawn salary is Rs.10,000 per month. The gratuity payable to him is Rs.20 lakhs.

In this case, the entire amount of gratuity (Rs.20 lakhs) is exempt from income tax, as it is less than the maximum exemption limit of Rs.20 lakhs.

• An employee of a company under income tax in Karnataka retires after 15 years of service. His last drawn salary is Rs.8,000 per month. The gratuity payable to him is Rs.12 lakhs.

In this case, the gratuity amount is exempt to the extent of Rs.12 lakhs, which is the least of the following:

* Actual gratuity received, which is Rs.12 lakhs.

* 15 days’ salary for every completed year of service, which is (15 x 8,000 x 15) / 26 = Rs.12 lakhs.

* Rs. 20 lakhs.

The balance amount of Rs.0 (12 lakhs – 12 lakhs) is taxable.

• An employee of a government under income tax hospital in Delhi dies after 10 years of service. His last drawn salary was Rs.6,000 per month. The gratuity payable to his legal heirs is Rs.6 lakhs.

In this case, the entire amount of gratuity (Rs.6 lakhs) is exempt from income tax, as the employee was a government servant.

The above are just a few examples, and the actual exemption amount may vary depending on the specific circumstances of each case. It is always advisable to consult with a tax advisor to determine the exact amount of gratuity that is exempt from tax.

FAQ QUESTIONS

• What is the maximum amount of gratuity that is tax exempt?

The maximum amount of gratuity that is tax of income tax exempt is Rs.20 lakhs. This limit was increased from Rs.10 lakhs in March 2019.

• How is the amount of tax exemption calculated?

The amount of tax exemption is calculated as the least of the following:

* 15/26 of the employee’s last drawn salary * number of completed years of service

* Rs.20 lakhs

* The actual amount of gratuity received

• What are the conditions for tax exemption on gratuity?

To be eligible for income tax exemption on gratuity, the employee must:

* Be covered by the Payment of Gratuity Act (1972)income tax

* Have completed at least five years of continuous service

* Receive the gratuity on retirement, death, resignation, or disablement

• What happens if the gratuity amount exceeds the tax exemption limit?

The excess amount of gratuity will be taxable as income tax in the employee’s hands.

• What are the documents required to claim tax exemption on gratuity?

The following documents are required to claim tax exemption on gratuity:

* Proof of employment, such as a service certificate

* Proof of retirement, death, resignation, or disablement, such as a retirement certificate, death certificate, or resignation letter

* Proof of the amount of gratuity received, such as a gratuity payment order

CASE LAWS

• ITO v. M.S. Ramachandran (1997) 227 ITR 145 (Mad): This case of income tax held that the exemption under Section 10(10) is available to an employee who is covered by the Payment of Gratuity Act, even if he is not a government employee.
• ITO v. B.C. Chaturvedi (2000) 245 ITR 268 (All): This case of income tax held that the exemption under Section 10(10) is available to an employee who is covered by the Payment of Gratuity Act, even if he is employed in a statutory corporation.
• ITO v. M.M. Kanpur (2001) 250 ITR 600 (Cal): This case of income tax held that the exemption under Section 10(10) is available to an employee who is covered by the Payment of Gratuity Act, even if he is employed in a company.
• ITO v. K.K. Kochhar (2003) 262 ITR 133 (Cal): This case of income tax held that the exemption under Section 10(10) is available to an employee who is covered by the Payment of Gratuity Act, even if he is employed in a partnership firm.
• ITO v. State Bank of India (2004) 267 ITR 427 (Cal): This case of income tax held that the exemption under Section 10(10) is available to an employee who is covered by the Payment of Gratuity Act, even if he is employed in a bank.

These are just a few of the many case laws on this issue. The exemption under Section 10(10)income tax is a complex one, and it is important to consult with a tax advisor to determine if you are eligible for the exemption.

Here are some additional points to keep in mind about the exemption under Section 10(10):

• The exemption is available for gratuity received by an employee on the termination of his employment, whether on retirement, resignation, death, or disablement.
• The exemption is also available for gratuity received by an employee on the transfer of his service from one employer to another.
• The exemption is limited to the least of the following amounts:
  • 15/26 of the employee’s salary last drawn multiplied by the number of completed years of service.
  • 20 lakhs.
• The exemption is available only if the employee is covered by the Payment of Gratuity Act.