Cheers! Gratuity received is tax free upto Rs. 10 Lacs

13th January 2011 – Gratuity refers to the lump sum receipt received from employer at the time of retirement, termination of service, resignation, superannuation, death or disablement. The gratuity is exempt from tax, if the employee has rendered continuous service of not less than five years. Further, if the employee cannot fulfil the condition of 5 years of continuous service and, if his service is terminated due to (i) termination due to ill health, (ii) termination due to contraction or discontinuance of the employer’s business; and (iii) termination due to any other reason beyond the control of the employee.

The provision with regard to taxability of gratuity is as below:

(a)          In the case of Govt. employees the whole of the gratuity is exempt from tax;

(b)         Where the gratuity is received under the payment of Gratuity Act, 1972, than the exemption shall be limited to the amount prescribed under the Act, which was Rs. 350000. Further, pursuant to amendment made on May 18, 2010, in the Gratuity Act, the limit of gratuity payment to employees has been increased to Rs 1000,000; and

(c)          In other cases, the exemption is available in respect of retirement gratuity, gratuity paid on becoming incapacitated prior to retirement or on termination of employment and gratuity paid on employee’s death to his widow, children or dependents.

The exempted portion of gratuity is calculated at one-half month’s salary for each year of completed service, taking average salary for the last 10 Month, subject to above mentioned ceiling limit for non-government employees. The ceiling of exemption is applied to the aggregate of the gratuities in case the same is received from more than one employer in the same year, or in different years.

Further, in case, 5 years of continuous service is not rendered by the employee for any other reason, the accumulated balance other than employee own contribution become taxable and the total income of the employee will be recomputed by the assessing officer as if the fund was not recognised from the beginning.

In case of lump sum payment received from unrecognised provident fund at the time of retirement or termination of service, employee’s own contribution is exempt from tax. Interest on employee’s contribution is taxable under the head “Income from other Sources”.

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Alok Patnia

Founder and Director at Taxmantra

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