Maximum Gratuity Amount Eligible for Exemption

Taxation of Gratuity in India

What is Gratuity?

How to calculate gratuity Gratuity is a lump sum amount that your employer pays you when you retire or resign from the organization. An Employee does not contribute any portion of his salary towards this amount.

Gratuity is paid out at the time of superannuation (if you retire at the age of 58), when you retire (at any other age) or resignation, and in the event of your death or being rendered disable because of an accident or illness. You need to have at least five full years of service with an employer to qualify for gratuity. This rule is relaxed in the last instance. In the event of your death, the gratuity will be paid to your nominee.

Who is Eligible for Gratuity?

If total period served with the current employer is less than 5 years no gratuity is payable to any individual means the employee who has completed 5 years (continuously) of his service under current employer is eligible for Gratuity.

How amount of Gratuity is calculated?

  • last drawn monthly salary as on date is taken into account
  • for calculation of gratuity period served at a stretch with one employer is counted
  • salary includes only basic pay and dearness allowance
  • only commission on salary paid on turnover basis is included

CASE-1

You are covered Under the Payment of Gratuity Act, 1971:

Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary X 15/26 X No. of years of service

Your last drawn salary will comprise your basic + DA. For computation of gratuity, your service period will be rounded off to the nearest full year.

CASE-2 

You are not covered Under Payment of Gratuity Act, 1971 

Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary X 1/2 X  No. of years of service

Your last drawn salary will comprise your basic + DA+ commission on sales on turnover basis. For computation of gratuity, your service period will not be rounded off to the nearest full year. While calculating completed years, any fraction of the year will be ignored. For instance, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

Gratuity is computed as below:

Actual Gratuity Received Less Exemption under section 10(10)

1. 15/26*completed year of service*10 months average salary
2. Actual Gratuity received
3. Maximum Rs.3,50,000/-

Among these which is least is eligible for exemption.

Gratuity computation if employee is resigned,terminated or retired

Actual Gratuity Received Less Exemption under section 10(10)

1. 1/2*10 months average salary*completed year of service
2. Actual Gratuity received
3. Maximum Rs.3,50,000/-

Among these which is least is eligible for exemption.

GRATUITY EXEMPTION under Income Tax: 

  • Death-cum-retirement gratuity received by employees of central or state governments and local authorities is exempt without limit.
  • Gratuity received under the Payment of Gratuity Act, 1971 is exempt to the extent that it does not exceed 15 days’ salary for every completed year of service calculated on the last drawn salary subject to a maximum of Rs 3.5 lakh.
  • Any other gratuity is exempt to the extent that it does not exceed one half-month salary’s for each year of completed service calculated on the basis of average salary for 10 immediately preceding months subject to a maximum of Rs 3.5 lakh.
  • The ceiling of Rs 3.5 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

Other Points:

  • Completed years of service: More than 6 months service will be counted as full year of service i.e. 1 year 7 month will counted 2 years
  • It may be noted that the number of years would be rounded off to the nearest year. Also, one needs to ensure continuous service as defined by the ACT.
  • The gratuity of an employee whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer shall be forfeited to the extent of the damage of loss so caused.
  • One has to put in a minimum service of 5 years to be eligible for gratuity, however, if the employee dies than the limit maybe relaxed to even one year. Gratuity is an excellent benefit given for an individual till he reaches the age of retirement
  • Gratuity has to be paid withing 30 days from the date it becomes due. If there is delay beyond 30 days, the employer is liable to pay simple interest at the rate notified by Government for long term deposits.
  • In case employers does not pay Gratuity, the Controlling Authority may ask collector to collect the amount of gratuity from the employer as per section 8.
  • If any employer contravenes this law, there is a penalty of Rs.10,000/- or 6 months of rigorous imprisonment or both.

Update: Please Note

The government has hiked the limits of gratuity payment from Rs 3.5 lakhs to Rs 10 lakhs. This enhanced limit is applicable to employees who retire, become incapacitated before retirement, expire or whose services were terminated on or after May 24, 2010.

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