Taxability on Gratuity
WHEN IS GRATUITY PAYABLE AS PER PAYMENT OF GRATUITY ACT 1972
Gratuity is payable to an employee when an employee leaves employment after completing at least five years in service with an employer.
So this is payable –
- On superannuation (means an employee who attains the age of retirement is said to be in superannuation)
- And on retirement or resignation
- On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)
Gratuity is not paid as part of your regular monthly salary; it is only payable on the occurrence of any of the above events.
If the employee’s services have been terminated due to any misconduct, the employer has the right to reject payment of Gratuity to the employee.
- If Gratuity is received by any employee while in employment then it is fully taxable in the hands of employee.
- While if gratuity is received in case of death or retirement or resignation, then exemption is available up to the following limits.
IN CASE OF GOVERNMENT EMPLOYEE
- Any gratuity received by an employee of Central Government, State Government or local authority is wholly exempt from tax. This exemption is not available to employees of Statutory Corporation.
IN CASE OF Non-Govt. EMPLOYEES
1) COVERED BY PAYMENT OF GRATUITY ACT
An amount equal to the least of the following will be exempt from tax
- 15/26 x Salary last drawn x No. Of completed years of service or part thereof in excess of 6 months.
- 10,00,000
- Gratuity actually received.
In case of seasonal establishments, 15 days is substituted by 7 days. Salary includes basic salary and dearness allowance but does not include bonus, commission, overtime wages or any other allowance. Part of a year exceeding six months is taken as a complete year.
2) IN CASE OF EMPLOYEE not covered by act
An amount equal to the least of the following will be exempt from tax
- ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
- 10,00,000
- Gratuity actually received
Salary includes basic pay, dearness allowance to the extent it forms part of retirement benefits and percentage wise fixed commission on turnover.
OTHER POINTS RELATED TO TAXATION
If gratuity is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of gratuity cannot exceed Rs. 10,00,000.
If an employee had also rendered service to any other employer, then period of service to such former employer is also included while calculating “completed year of service” subject to condition that any gratuity is not received from such former employer.
In case of death of the employee, it has to be paid to the nominee or the legal heir of the employee. In this case, the exemption is calculated in the same manner as above and is taxed for the receiver under the head “Income from Other Sources”.
Taxability & Exemption from Employer Point of View
Section 43B disallows the sum which are not paid in the financial year as well as not paid before due date of filing income tax return.
The following sum are allowed in the year in which they are incurred, only if they are paid before the due date of furnishing the return of income under section 139(1) of that year.
As an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.
i.e. If employer does not paid the statutory dues of gratuity before the due date of filling of return the same will be taxable in the hands of employer as income.
-Bhushan Tidke (Article Assistant)
-Nagpur.
