Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).
The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail.
For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories –
(a) Government employees and
(b) Non-government employees covered under the Payment of Gratuity Act, 1972
(c) Non-government employees not covered under the Payment of Gratuity Act, 1972
In case of government employees – they are fully exempt from receipt of gratuity.
In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:
(i) Actual gratuity received;
(ii) Rs 10,00,000;
(iii) 15 days’ salary for each completed year of service.
Employer is liable to pay gratuity to the employee even after full and final payment by signing that his receive all payment does not affect his right to claim gratuity.
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